Social Networks, Employment and Worker Discouragement: Evidence from South Africa

Social networks are increasingly being recognised as having an important influence on labour market outcomes, since they facilitate the exchange of job related information. Access to information about job opportunities as well as perceptions about the buoyancy of the labour market depend critically on the social structures and the social networks to which labour market participants belong. In this paper, we examine the impact of information externalities generated through network membership on labour market status. Using Census data from South Africa, a country characterised by high levels of unemployment and worker discouragement, we adopt an econometric approach that aims to minimise the problems of omitted variable bias that have plagued many previous studies of the impact of social networks. Our results suggest that social networks may enhance employment probabilities by an additional 3 to 9%, and that failure to adequately control for omitted variables would lead to substantial over-estimates of the network co-efficient. Social networks affect both employment probabilities and worker discouragement, and are particularly important for individuals residing in rural areas, those with disabilities, and those who are black or female.