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Wages and Employment in a Random Social Network with Arbitrary Degree Distribution

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  • Yannis Ioannides
  • Adriaan Soetevent

Abstract

Empirical studies of labor markets show that social contacts are an important source of job-related information [Ioannides and Loury (2004)]. At the same time, wage differences among workers may be explained only in part by differences in individual background characteristics. Such findings motivate our model in which differences in "social connectedness" among otherwise identical workers result in wage inequality and differences in unemployment rates. The paper is related to theoretical contributions by Calvo- Armengol and Jackson (2004) and Calvo-Armengol and Zenou (2005) and builds on the Pissarides (2000) model. Workers may hear about job openings directly from employers or through their social contacts. We go further by introducing heterogeneity in the number of contacts each worker has with others, i.e. in the workers' degree. We utilize results from the technical literature on random graphs with arbitrary degree distributions [Newman, (2003a)] to account for a consequence of workers' receiving information about job openings from their social contacts: they compete with their social contacts' other contacts. For social networks with arbitrary degree distributions we show that people who are better connected receive a higher wage on average and face a lower unemployment rate. Numerical computations for the specific case in which connections follow a Poisson distribution show that variability in connections can result in substantial variation in the above labor market outcomes.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0601.

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Date of creation: 2006
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Handle: RePEc:tuf:tuftec:0601

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Keywords: job search; social networks; arbitrary degree distribution; wage inequality; incidence of unemployment;

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References

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  1. Fontaine, Francois, 2005. "Why Are Similar Workers Paid Differently? The Role of Social Networks," IZA Discussion Papers 1786, Institute for the Study of Labor (IZA).
  2. Calvó-Armengol, Antoni & Zenou, Yves, 2003. "Job Matching, Social Network and Word-of-Mouth Communication," IZA Discussion Papers 771, Institute for the Study of Labor (IZA).
  3. Kenneth J. Arrow & Ron Borzekowski, 2004. "Limited network connections and the distribution of wages," Finance and Economics Discussion Series 2004-41, Board of Governors of the Federal Reserve System (U.S.).
  4. Samuel Bentolila & Claudio Michelacci & Javier Suarez, 2004. "Social Contacts And Occupational Choice," Working Papers wp2004_06, CEMFI.
  5. Mortensen, Dale T. & Vishwanath, Tara, 1994. "Personal contacts and earnings : It is who you know!," Labour Economics, Elsevier, vol. 1(2), pages 187-201, March.
  6. Antoni Calvó-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.
  7. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  8. Yannis M. Ioannides & Linda Datcher Loury, 2004. "Job Information Networks, Neighborhood Effects, and Inequality," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1056-1093, December.
  9. Scott A. Boorman, 1975. "A Combinatorial Optimization Model for Transmission of Job Information through Contact Networks," Bell Journal of Economics, The RAND Corporation, vol. 6(1), pages 216-249, Spring.
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Cited by:
  1. Cappellari, Lorenzo & Tatsiramos, Konstantinos, 2010. "Friends' Networks and Job Finding Rates," IZA Discussion Papers 5240, Institute for the Study of Labor (IZA).
  2. Berardi, Nicoletta & Seabright, Paul, 2011. "Professional Network and Career Coevolution," IDEI Working Papers 688, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Marco van der Leij & Sebastian Buhai, 2010. "A Social Network Analysis of Occupational Segregation," 2010 Meeting Papers 554, Society for Economic Dynamics.
  4. Walter Trockel, 2012. "Robustness of Intermediate Agreements for the Discrete Raiffa Solution," Working Papers 472, Bielefeld University, Center for Mathematical Economics.
  5. Gilbert E. Metcalf, 2006. "Value-Added Tax," Discussion Papers Series, Department of Economics, Tufts University 0608, Department of Economics, Tufts University.
  6. Antonio Cabrales & Antoni Calvo-Armengol & Yves Zenou, 2007. "Effort and synergies in network formation," Economics Working Papers we072515, Universidad Carlos III, Departamento de Economía.
  7. Anna Zaharieva, 2012. "Double Matching: Social Contacts in a Labour Market with On-the-Job Search," Working Papers 473, Bielefeld University, Center for Mathematical Economics.
  8. Â Leif Brandes & Â Marc Brechot & Â Egon Franck, . "Â The Temptation of Social Ties: When Interpersonal Network Transactions Hurt Firm Performance," Working Papers 00159, University of Zurich, Institute for Strategy and Business Economics (ISU), revised 2012.
  9. repec:ese:iserwp:2011-21 is not listed on IDEAS
  10. Sebastian Buhai & Marco van der Leij, 2006. "A Social Network Analysis of Occupational Segregation," Tinbergen Institute Discussion Papers 06-016/1, Tinbergen Institute, revised 08 Nov 2006.

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