The Effects of Social Networks on Labor-Market Outcomes

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It has long been recognized that many workers find jobs through friends and relatives. A number of area labor-market studies carried out by economists attest to the importance of social contacts in the hiring process, whereas a number of studies carried out by sociologists confirm the importance of social contacts in influencing labor-market outcomes in the form of individuals' wages and job satisfaction. These lines of research focus on the specific contact used by a worker to find a job rather than on more general characteristics of the worker's social network. This project formalizes hypotheses offered by sociologists about social networks with the aim of facilitating better interpretation of existing empirical work on labor-market outcomes and processes and of developing more appropriate testing strategies. It also develops a model that suggests that equilibrium differences in wage and labor-force participation between groups may be a byproduct of referral hiring. Beyond reproducing observed differences in wages and participation, the model also predicts the greater use of referrals by males and an observed pattern of own- sex referrals. This research to develop the theoretical underpinnings of social network effects in the labor market helps fill a gap in labor economics, and it contributes to the integration of the optimizing and equilibrium methods of economics into important sociological empirical work in the area of social networks. This project has important implications for understanding earnings inequality and its transmission across generations, poverty and the "underclass," and the process of the job search.