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Networks in Labor Markets: Wage and Employment Dynamics and Inequality

  • Antoni Calvó-Armengol
  • Matthew O. Jackson

We present a model of labor markets that accounts for the social network through which agents hear about jobs. We show that an improvement in the wage or employment status of either an agent's direct or indirect contacts leads to an increase in the agent's employment probability and expected wages, in the sense of first order stochastic dominance. A similar effect results from an increase in the network contacts of an agent. In terms of dynamics and patterns, we show that both wages and employment are positively associated (a strong form of correlation) across time and agents. We also analyze the decisions of agents regarding staying in the labor market or dropping out. If there are costs to staying in the labor market, and we compare two networks of agents that are identical except that one group starts with a worse wage status, then that group's drop-out rate will be higher that the other's and there will be a persistent difference in wages between the groups.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 55.

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Date of creation: Apr 2003
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Handle: RePEc:bge:wpaper:55
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  1. Steven N. Durlauf, 1992. "A Theory of Persistent Income Inequality," NBER Working Papers 4056, National Bureau of Economic Research, Inc.
  2. 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.
  3. Farley, Reynolds, 1990. "Blacks, Hispanics, and White Ethnic Groups: Are Blacks Uniquely Disadvantaged?," American Economic Review, American Economic Association, vol. 80(2), pages 237-41, May.
  4. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  5. 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.
  6. James J. Heckman, 1998. "Detecting Discrimination," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 101-116, Spring.
  7. William A. Darity & Patrick L. Mason, 1998. "Evidence on Discrimination in Employment: Codes of Color, Codes of Gender," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 63-90, Spring.
  8. Smith, James P & Welch, Finis R, 1989. "Black Economic Progress after Myrdal," Journal of Economic Literature, American Economic Association, vol. 27(2), pages 519-64, June.
  9. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
  10. David Card & Alan B. Krueger, 1991. "School Quality and Black-White Relative Earnings: A Direct Assessment," NBER Working Papers 3713, National Bureau of Economic Research, Inc.
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