IDEAS home Printed from https://ideas.repec.org/p/bie/wpaper/459.html
   My bibliography  Save this paper

Social welfare and wage inequality in search equilibrium with personal contacts

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://pub.uni-bielefeld.de/download/2671705/2671706
    File Function: First Version, 2011
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    2. Fontaine, François, 2008. "Why are similar workers paid differently? the role of social networks," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3960-3977, December.
    3. Miles Corak & Patrizio Piraino, 2011. "The Intergenerational Transmission of Employers," Journal of Labor Economics, University of Chicago Press, vol. 29(1), pages 37-68, January.
    4. 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.
    5. Michele Pellizzari, 2010. "Do Friends and Relatives Really Help in Getting a Good Job?," ILR Review, Cornell University, ILR School, vol. 63(3), pages 494-510, April.
    6. 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.
    7. 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.
    8. Calvo-Armengol, Antoni & Jackson, Matthew O., 2007. "Networks in labor markets: Wage and employment dynamics and inequality," Journal of Economic Theory, Elsevier, vol. 132(1), pages 27-46, January.
    9. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, vol. 74(2), pages 323-364, March.
    10. Montgomery, James D, 1991. "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, American Economic Association, vol. 81(5), pages 1407-1418, December.
    11. Pierre Cahuc & François Fontaine, 2009. "On the Efficiency of Job Search with Social Networks," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(3), pages 411-439, June.
    12. Lorenzo Cappellari & Konstantinos Tatsiramos, 2010. "Friends’ Networks and Job Finding Rates," DISCE - Quaderni dell'Istituto di Economia dell'Impresa e del Lavoro ieil0059, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    13. Francois Fontaine, 2003. "Do workers really benefit from their social networks?," Macroeconomics 0311002, University Library of Munich, Germany, revised 26 Aug 2004.
    14. Blázquez, Maite & Jansen, Marcel, 2008. "Search, mismatch and unemployment," European Economic Review, Elsevier, vol. 52(3), pages 498-526, April.
    15. Tore Ellingsen & Asa Rosen, 2003. "Fixed or Flexible? Wage-setting in Search Equilibrium," Economica, London School of Economics and Political Science, vol. 70(278), pages 233-250, May.
    16. Kugler, Adriana D., 2003. "Employee referrals and efficiency wages," Labour Economics, Elsevier, vol. 10(5), pages 531-556, October.
    17. David Margolis & Véronique Simonnet, 2002. "Educational Track, Networks and Labor Market Outcomes," Working Papers 2002-60, Center for Research in Economics and Statistics.
    18. Guler, Bulent & Guvenen, Fatih & Violante, Giovanni L., 2012. "Joint-search theory: New opportunities and new frictions," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 352-369.
    19. John T. Addison & Pedro Portugal, 2002. "Job search methods and outcomes," Oxford Economic Papers, Oxford University Press, vol. 54(3), pages 505-533, July.
    20. 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, January.
    21. Robert E. Hall & Alan B. Krueger, 2008. "Wage Formation between Newly Hired Workers and Employers: Survey Evidence," Working Papers 1095, Princeton University, Department of Economics, Industrial Relations Section..
    22. John T. Addison & Pedro Portugal, 1998. "Job Search Methods and Outcomes," Working Papers w199808, Banco de Portugal, Economics and Research Department.
    23. 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.
    24. Zaharieva, Anna, 2013. "Double Matching: Social Contacts in a Labour Market with On-the-Job Search," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79891, Verein für Socialpolitik / German Economic Association.
    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. 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.
    27. 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, June.
    28. Mortensen, D. T. & Vishwanath, T., 1995. "Personal contacts and earnings: It is who you know!," Labour Economics, Elsevier, vol. 2(1), pages 103-104, March.
    29. 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.
    30. 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.
    31. Claudio Michelacci & Javier Suarez, 2006. "Incomplete Wage Posting," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1098-1123, December.
    32. 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.
    33. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    34. Fontaine, Francois, 2007. "A simple matching model with social networks," Economics Letters, Elsevier, vol. 94(3), pages 396-401, March.
    35. 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.
    36. 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.
    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).
    38. 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, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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).
    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. 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.
    5. 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.
    6. Rao, Neel, 2016. "Social effects in employer learning: An analysis of siblings," Labour Economics, Elsevier, vol. 38(C), pages 24-36.
    7. 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.
    8. Rebien, Martina & Stops, Michael & Zaharieva, Anna, 2017. "Formal search and referrals from a firm's perspective," Center for Mathematical Economics Working Papers 578, Center for Mathematical Economics, Bielefeld University.
    9. repec:spr:jopoec:v:31:y:2018:i:3:d:10.1007_s00148-017-0672-x is not listed on IDEAS
    10. 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.
    11. repec:eee:labeco:v:50:y:2018:i:c:p:112-127 is not listed on IDEAS

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bie:wpaper:459. 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: (Bettina Weingarten). General contact details of provider: http://edirc.repec.org/data/imbiede.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.