Social Networks and Wages: It's All About Connections!

Empirical evidence suggests that networks of personal relations are very important in the micro dynamics of labor markets: irrespectively of the country and the occupation considered a high share of jobs are filled by social referrals. In this paper we add theoretical speculation and empirical evidence to this stylized fact shedding light on an apparent puzzle: the effect of informal contacts on wages. We, first, review the literature arguing that economic perspectives on the effect of social networks use on wages can benefit from considering differences in the nature of social ties. Second, we propose a formal model which considers two different informal contacts which we call "family" and "professional". The model predicts that while the use of the former type is likely to have a negative impact on wages, the opposite is true for the latter. Third, we use a relatively unexploited Italian data set to show how different ties have different properties and are likely to be used for different purposes. Finally, we concentrate on the relation between informal contacts and wages, obtaining results which are consistent with our theoretical insights.