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Social welfare and wage inequality in search equilibrium with personal contacts

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  • Zaharieva, Anna

    (Center for Mathematical Economics, Bielefeld University)

Abstract

This paper incorporates job search through personal contacts into an equilibrium matching model with a segregated labour market. Job search in the public submarket is competitive which is in contrast with the bargaining nature of wages in the informal job market. Moreover, the social capital of unemployed workers is endogenous depending on the employment status of their contacts. 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 an economy with weak ties. This inefficiency is explained by a network externality: weak ties yield higher wages in the informal submarket than family contacts. Furthermore, the spillovers between the two submarkets imply that wage premiums associated with personal contacts lead to higher wages paid to unemployed workers with low social capital but the probability to find a job for those workers is below the optimal level.

Suggested Citation

  • Zaharieva, Anna, 2014. "Social welfare and wage inequality in search equilibrium with personal contacts," Center for Mathematical Economics Working Papers 459, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:459
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Rebien, Martina & Stops, Michael & Zaharieva, Anna, 2017. "Formal search and referrals from a firm's perspective," IAB Discussion Paper 201733, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    2. repec:spr:jopoec:v:31:y:2018:i:3:d:10.1007_s00148-017-0672-x is not listed on IDEAS
    3. Yuliia Stupnytska & Anna Zaharieva, 2017. "Optimal policy and the role of social contacts in a search model with heterogeneous workers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(5), pages 957-985, October.
    4. Semih Tumen, 2016. "Informal versus formal search: Which yields better pay?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(3), pages 257-277, September.
    5. Zaharieva, Anna, 2015. "Social contacts and referrals in a labor market with on-the-job search," Labour Economics, Elsevier, vol. 32(C), pages 27-43.
    6. Huiru Zhao & Sen Guo & Qi Zhang & Chunjie Li, 2014. "Social Welfare Evaluation of Electric Universal Service in China: From the Perspective of Sustainability," Sustainability, MDPI, Open Access Journal, vol. 6(8), pages 1-17, August.
    7. Zaharieva, Anna, 2015. "On the Puzzle of Diversification in Social Networks with Occupational Mismatch," Center for Mathematical Economics Working Papers 547, Center for Mathematical Economics, Bielefeld University.
    8. repec:eee:labeco:v:50:y:2018:i:c:p:112-127 is not listed on IDEAS
    9. Gauer, Florian & Landwehr, Jakob, 2016. "Continuous homophily and clustering in random networks," Center for Mathematical Economics Working Papers 515, Center for Mathematical Economics, Bielefeld University.
    10. Rao, Neel, 2016. "Social effects in employer learning: An analysis of siblings," Labour Economics, Elsevier, vol. 38(C), pages 24-36.
    11. Chen, Yuanyuan & Wang, Le & Zhang, Min, 2017. "Informal Search, Bad Search? The Effects of Job Search Method on Wages among Rural Migrants in Urban China," IZA Discussion Papers 11058, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    network formation; labour economics;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • D10 - Microeconomics - - Household Behavior - - - General

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