In this paper we study the effects of social networks on wage inequality and aggregate production. In particular, we consider a simplified version of the model by Calvo'-Armengol and Jackson (2003), with good and bad jobs and skilled and unskilled workers. Our findings are: i) increasing the number of social links increases aggregate output and may reduce inequality; ii) given a number of social connections, output increases if the average distance among worker decreases; iii) a more mixed and well-integrated society, that is a society in which heterogeneous workers share social links, produces more output and less inequality than a society in which some workers are isolated, when productivity of the most productive agents in the best jobs is sufficiently low. We draw some policy implications from these results.
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Paper provided by Dipartimento di Scienze Economiche (DSE), University of Pisa, Pisa, Italy in its series Discussion Papers with number
2004/42.