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Limited network connections and the distribution of wages

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Author Info
Kenneth J. Arrow
Ron Borzekowski

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Abstract

It is well-known that 50% or more of all jobs are obtained through informal channels i.e. connections to family or friends. As well, statistical studies show that observable individual factors account for only about 50% of the very wide variation in earnings. We seek to explain these two facts by assuming that the linking of workers and firms is mediated by limited network connections. The model implies that essentially similar workers can have markedly different wages and further that the inequality of wages is partly explained by variations in the sizes of workers' networks. Our results indicate that differences in the number of ties can induce substantial inequality and can explain roughly 15% of the unexplained variation in wages. We also show that reasonable differences in the average number of links between blacks and whites can explain the disparity in black and white income distributions.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2004-41.

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Date of creation: 2004
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Handle: RePEc:fip:fedgfe:2004-41

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Keywords: Wages Labor market

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Luigi Pistaferri, 1999. "Informal Networks in the Italian Labor Market," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 58(3-4), pages 355-375, December.
  2. Arrow, Kenneth J, 1998. "What Has Economics to Say about Racial Discrimination?," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 91-100, Spring. [Downloadable!] (restricted)
  3. Simon, Curtis J & Warner, John T, 1992. "Matchmaker, Matchmaker: The Effect of Old Boy Networks on Job Match Quality, Earnings, and Tenure," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 306-30, July. [Downloadable!] (restricted)
  4. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-18, December.
  5. Loury, Glenn C, 1998. "Discrimination in the Post-Civil Rights Era: Beyond Market Interactions," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 117-26, Spring. [Downloadable!] (restricted)
  6. Holzer, Harry J, 1987. "Informal Job Search and Black Youth Unemployment," American Economic Review, American Economic Association, vol. 77(3), pages 446-52, June. [Downloadable!] (restricted)
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  7. Brian Krauth, 1998. "A Dynamic Model of Job Networks and Persistent Inequality," Research in Economics 98-06-049e, Santa Fe Institute. [Downloadable!]
  8. Datcher, Linda, 1983. "The Impact of Informal Networks of Quit Behavior," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 491-95, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Matthew O. Jackson & Antoni Calvo-Armengol, . "Social Networks and Resulting Patterns and Dynamics of Employment and Wages," Grand Coalition 9, Grand Coalition Web Site. [Downloadable!]
  2. Buhai, Sebastian & van der Leij, Marco, 2006. "A Social Network Analysis of Occupational Segregation," Working Papers 06-11, University of Aarhus, Aarhus School of Business, Department of Economics. [Downloadable!]
    Other versions:
  3. Antoni Calvo-Armengol & Matthew O. Jackson, 2004. "The Effects of Social Networks on Employment and Inequality," American Economic Review, American Economic Association, vol. 94(3), pages 426-454, June. [Downloadable!] (restricted)
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  4. Yannis M. Ioannides & Adriaan R. Soetevent, 2006. "Wages and Employment in a Random Social Network with Arbitrary Degree Distribution," Tinbergen Institute Discussion Papers 06-014/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  5. Matthew O. Jackson, 2003. "A survey of models of network formation: Stability and efficiency," Working Papers 1161, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
    Other versions:
  6. Antoni Calvo-Armengol & Matthew O. Jackson, 2002. "Social Networks in Determining Employment and Wages: Patterns, Dynamics, and Inequality," Microeconomics 0211007, EconWPA. [Downloadable!]
    Other versions:
  7. Matthew O. Jackson, 2002. "The Stability and Efficiency of Economic and Social Networks," Microeconomics 0211011, EconWPA. [Downloadable!]
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