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Friends in Low Places: Network Capital and the Scarring of Labor Markets

Author

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  • Joseph Kopecky

    (Department of Economics, Trinity College Dublin)

Abstract

Why do deep recessions scar labor markets long after their shocks fade? Networks of employed contacts, built by employment, eroded by unemployment, are a depreciable capital stock that no one owns. I build this stock into a heterogeneous‐agent model of the U.S. labor market, disciplined by three decades of CPS data on cyclical job‐search behavior. In a calibrated China‐shock experiment, the network accounts for a quarter to a third of the employment scar, concentrated on low‐wealth workers. Its destruction is an unpriced externality; a state‐contingent hiring credit corrects it cheaply in this economy and dominates equal‐cost unemployment insurance.

Suggested Citation

  • Joseph Kopecky, 2026. "Friends in Low Places: Network Capital and the Scarring of Labor Markets," Trinity Economics Papers tep2626, Trinity College Dublin, Department of Economics.
    • Handle: RePEc:tcd:tcduee:tep2626
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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