Labour Market Networks, Underclasses and Inequality
About half of all vacancies are filled through networks of personal contact. We consider the implications of such labour market networks for inequality. Our central result is that referral networks display threshold behaviour. Above a critical density of referals, qualified workers at all levels of the network are recruited with probability one. Below the threshold, workers low in the hierachy are hired with probability zero: an underclass emerges. Although there is no discrimination, workers with the same distribution of ability at different layers of the network have very different average incomes, reflecting differences of social capital in the form of labour market contacts.
(This abstract was borrowed from another version of this item.)
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