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Limited network connections and the distribution of wages

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  • Kenneth J. Arrow
  • Ron Borzekowski

Abstract

It is well-known that 50% or more of all jobs are obtained through informal channels i.e. connections to family or friends. As well, statistical studies show that observable individual factors account for only about 50% of the very wide variation in earnings. We seek to explain these two facts by assuming that the linking of workers and firms is mediated by limited network connections. The model implies that essentially similar workers can have markedly different wages and further that the inequality of wages is partly explained by variations in the sizes of workers' networks. Our results indicate that differences in the number of ties can induce substantial inequality and can explain roughly 15% of the unexplained variation in wages. We also show that reasonable differences in the average number of links between blacks and whites can explain the disparity in black and white income distributions.

Suggested Citation

  • 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.).
  • Handle: RePEc:fip:fedgfe:2004-41
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    References listed on IDEAS

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    Cited by:

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    4. Tenev, Nicholas H, 2020. "Social Connections and Racial Wage Inequality," SocArXiv vm82w, Center for Open Science.
    5. Pintea Mihaela, 2020. "Dynamics of female labor force participation and welfare with multiple social reference groups," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-23, January.
    6. Seabright, Paul & Berardi, Nicoletta, 2011. "Professional Network and Career Coevolution," CEPR Discussion Papers 8632, C.E.P.R. Discussion Papers.
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    8. Matthew O. Jackson, 2003. "A survey of models of network formation: Stability and efficiency," Working Papers 1161, California Institute of Technology, Division of the Humanities and Social Sciences.
    9. Buhai, I. Sebastian & van der Leij, Marco J., 2023. "A Social Network Analysis of Occupational Segregation," Journal of Economic Dynamics and Control, Elsevier, vol. 147(C).
    10. Ilse Lindenlaub & Anja Prummer, 2014. "Gender, Social Networks And Performance," Cambridge Working Papers in Economics 1461, Faculty of Economics, University of Cambridge.
    11. Yannis M. Ioannides & Adriaan R. Soetevent, 2006. "Wages and Employment in a Random Social Network with Arbitrary Degree Distribution," American Economic Review, American Economic Association, vol. 96(2), pages 270-274, May.
    12. Yang, J.-H. Steffi, 2009. "Social network influence and market instability," Journal of Mathematical Economics, Elsevier, vol. 45(3-4), pages 257-276, March.
    13. 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.
    14. Federico Cingano & Alfonso Rosolia, 2006. "People I Know: Workplace Networks and Job Search Outcomes," Temi di discussione (Economic working papers) 600, Bank of Italy, Economic Research and International Relations Area.
    15. Nabanita Datta Gupta & Lene Kromann, 2014. "Differences in the labor market entry of second-generation immigrants and ethnic Danes," IZA Journal of Migration and Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-22, December.
    16. Yulia Evsyukova & Felix Rusche & Wladislaw Mill, 2023. "LinkedOut? A Field Experiment on Discrimination in Job Network Formation," CRC TR 224 Discussion Paper Series crctr224_2023_482, University of Bonn and University of Mannheim, Germany.
    17. Jackson, Matthew O. & Calvo, Antoni, 2002. "Social Networks in Determing Employment and Wages: Patterns, Dynamics, and Inequality," Working Papers 1149, California Institute of Technology, Division of the Humanities and Social Sciences.
    18. Burns, Justine & Godlonton, Susan & Keswell, Malcolm, 2010. "Social networks, employment and worker discouragement: Evidence from South Africa," Labour Economics, Elsevier, vol. 17(2), pages 336-344, April.
    19. Tassier, Troy & Menczer, Filippo, 2008. "Social network structure, segregation, and equality in a labor market with referral hiring," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 514-528, June.
    20. Matthew O. Jackson, 2002. "The Stability and Efficiency of Economic and Social Networks," Microeconomics 0211011, University Library of Munich, Germany.
    21. Evgeniya Polyakova & Larisa Smirnykh, 2015. "The Impact of Sectoral Segregation on the Earning Differential between Natives and Immigrants in Russia," HSE Working papers WP BRP 110/EC/2015, National Research University Higher School of Economics.
    22. Ilse Lindenlaub & Anja Prummer, 2014. "Gender, Social Networks And Performance," Cambridge Working Papers in Economics 1461, Faculty of Economics, University of Cambridge.
    23. Matthew O. Jackson, 2020. "A typology of social capital and associated network measures," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 54(2), pages 311-336, March.
    24. Kan, Kamhon, 2007. "Residential mobility and social capital," Journal of Urban Economics, Elsevier, vol. 61(3), pages 436-457, May.

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