IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article

Social welfare and wage inequality in search equilibrium with personal contacts

  • Zaharieva, Anna

This paper incorporates job search through personal contacts into an equilibrium matching model with a segregated labor market. Firms can post wage offers in the regular job market, alternatively they can save on advertising costs and rely on word-of-mouth communication. Wages are then negotiated ex-post between the firm and the applicant, so the model can generate wage premiums or penalties depending on the parameter of bargaining power. Moreover, this paper shows that the traditional Hosios (1990) condition continues to hold in an economy with family contacts but it fails to provide efficiency in the economy with weak ties. There are two reasons for the inefficiency. First, workers bargaining over wages do not internalize the positive external effect on their contacts, originating from a higher probability of finding a job. This network externality puts an upward pressure on wages so the market tightness in the referral market is distorted downwards. Second, weak ties do not act in full interest of the unemployed worker so their search intensity is inefficiently low. Finally, this paper shows that a combination of a hiring subsidy and a referral bonus can decentralize the efficient allocation in the economy with weak ties.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0927537113000596
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 23 (2013)
Issue (Month): C ()
Pages: 107-121

as
in new window

Handle: RePEc:eee:labeco:v:23:y:2013:i:c:p:107-121
Contact details of provider: Web page: http://www.elsevier.com/locate/labeco

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.:

as in new window
  1. Fontaine, Francois, 2004. "Do Workers Really Benefit From Their Social Networks?," IZA Discussion Papers 1282, Institute for the Study of Labor (IZA).
  2. Samuel Bentolila & Claudio Michelacci & Javier Suarez, 2010. "Social Contacts and Occupational Choice," Economica, London School of Economics and Political Science, vol. 77(305), pages 20-45, 01.
  3. John T. Addison & Pedro Portugal, 2002. "Job search methods and outcomes," Oxford Economic Papers, Oxford University Press, vol. 54(3), pages 505-533, July.
  4. Tumen, Semih, 2015. "Informal versus Formal Search: Which Yields a Better Pay?," IZA Discussion Papers 9573, Institute for the Study of Labor (IZA).
  5. Fontaine Francois, 2004. "Why are similar workers paid differently? The role of social networks," Labor and Demography 0408014, EconWPA, revised 09 Sep 2004.
  6. Cahuc, Pierre & Postel-Vinay, Fabien & Robin, Jean-Marc, 2003. "Wage Bargaining with On-The-Job Search: Theory and Evidence," CEPR Discussion Papers 4154, C.E.P.R. Discussion Papers.
  7. Giovanni L. Violante & Fatih Guvenen & Bulent Guler, 2008. "Joint-Search Theory: New Opportunities and New Frictions," 2008 Meeting Papers 856, Society for Economic Dynamics.
  8. Michele Pellizzari, 2010. "Do Friends and Relatives Really Help in Getting a Good Job?," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(3), pages 494-510, April.
  9. Michelacci, Claudio & Suarez, Javier, 2002. "Incomplete Wage Posting," CEPR Discussion Papers 3658, C.E.P.R. Discussion Papers.
  10. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  11. Ellingsen, Tore & Rosén, Åsa, 1997. "Fixed or Flexible? Wage Setting in Search Equilibrium," Working Paper Series 1997:17, Uppsala University, Department of Economics.
  12. Miles Corak & Patrizio Piraino, 2011. "The Intergenerational Transmission of Employers," Journal of Labor Economics, University of Chicago Press, vol. 29(1), pages 37-68, 01.
  13. Margolis, David N. & Simonnet, Véronique, 2003. "Educational Track, Networks and Labor Market Outcomes," IZA Discussion Papers 699, Institute for the Study of Labor (IZA).
  14. 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.
  15. Francis Kramarz & Oskar Nordström Skans, 2014. "When Strong Ties are Strong: Networks and Youth Labour Market Entry," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1164-1200.
  16. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  17. Yannis M. Ioannides & Linda Datcher Loury, 2002. "Job Information Networks, Neighborhood Effects and Inequality," Discussion Papers Series, Department of Economics, Tufts University 0217, Department of Economics, Tufts University.
  18. Gautier, Pieter A, 2002. "Unemployment and Search Externalities in a Model with Heterogeneous Jobs and Workers," Economica, London School of Economics and Political Science, vol. 69(273), pages 21-40, February.
  19. Hall, Robert & Krueger, Alan B., 2008. "Wage Formation between Newly Hired Workers and Employers: Survey Evidence," IZA Discussion Papers 3775, Institute for the Study of Labor (IZA).
  20. 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.
  21. Valentina Meliciani & Debora Radicchia, 2011. "The informal recruitment channel and the quality of job-worker matches: an analysis on Italian survey data," Industrial and Corporate Change, Oxford University Press, vol. 20(2), pages 511-554, April.
  22. Eric Delattre & Mareva Sabatier, 2007. "Social Capital and Wages: An Econometric Evaluation of Social Networking's Effects," LABOUR, CEIS, vol. 21(2), pages 209-236, 06.
  23. Pierre Cahuc & François Fontaine, 2009. "On the efficiency of job search with social network," Post-Print hal-00395653, HAL.
  24. Lorenzo Cappellari & Konstantinos Tatsiramos, 2010. "Friends' Networks and Job Finding Rates," CESifo Working Paper Series 3243, CESifo Group Munich.
  25. Flabbi, Luca & Mabli, James, 2012. "Household Search or Individual Search: Does It Matter? Evidence from Lifetime Inequality Estimates," IZA Discussion Papers 6908, Institute for the Study of Labor (IZA).
  26. Anna Zaharieva, 2012. "Double Matching: Social Contacts in a Labour Market with On-the-Job Search," Center for Mathematical Economics Working Papers 473, Center for Mathematical Economics, Bielefeld University.
  27. 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.
  28. Kugler, Adriana D., 2003. "Employee referrals and efficiency wages," Labour Economics, Elsevier, vol. 10(5), pages 531-556, October.
  29. Blázquez, Maite & Jansen, Marcel, 2008. "Search, mismatch and unemployment," European Economic Review, Elsevier, vol. 52(3), pages 498-526, April.
  30. Antoni Calvó-Armengol & Matthew O. Jackson, 2003. "Networks in Labor Markets: Wage and Employment Dynamics and Inequality," Working Papers 55, Barcelona Graduate School of Economics.
  31. Elena Bardasi & Mark Taylor, 2008. "Marriage and Wages: A Test of the Specialization Hypothesis," Economica, London School of Economics and Political Science, vol. 75(299), pages 569-591, 08.
  32. Robert E. Hall & Alan B. Krueger, 2010. "Evidence on the Determinants of the Choice between Wage Posting and Wage Bargaining," NBER Working Papers 16033, National Bureau of Economic Research, Inc.
  33. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
  34. 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.
  35. Fontaine, Francois, 2007. "A simple matching model with social networks," Economics Letters, Elsevier, vol. 94(3), pages 396-401, March.
  36. Mauro Sylos Labini, 2004. "Social Networks and Wages: It's All About Connections!," LEM Papers Series 2004/10, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  37. Bingley, Paul & Corak, Miles & Westergård-Nielsen, Niels C., 2011. "The Intergenerational Transmission of Employers in Canada and Denmark," IZA Discussion Papers 5593, Institute for the Study of Labor (IZA).
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:labeco:v:23:y:2013:i:c:p:107-121. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.