Edited by Neri Salvadori and Renato Balducci
Chapter 7: Job contact networks, inequality and aggregate output
* Andrea Mario Lavezzi and Nicola Meccheri 7.1. INTRODUCTION The importance of social networks in labour markets is well documented in the sociological literature (for example, Granovetter, 1974) which highlights the importance of social links, like friends, relatives and acquaintances, as sources of information on jobs. A number of empirical studies report that approximately between 40 per cent and 60 per cent of employed workers found their jobs through social networks although, in general, these proportions vary with sex, occupations, skills, and workers’ socio-economic background.1 Another line of empirical research shows that observable individual characteristics (for example, education, skill level, abilities, family, etc.) account for only about 50 per cent of wage inequality (see Arrow and Borzekowski, 2003, for references). The fact that workers have different social ties or links can play a role in explaining such evidence. In particular, all other variables held constant, workers with different networks will on average have different wages and employment opportunities. Furthermore, as remarked by Calvó-Armengol and Jackson (2004), variables such as workers’ location or race may capture network effects, and therefore they can interact with other workers’ individual characteristics in explaining wage outcomes and inequality. Joining a growing economic literature, we model social networks in labour markets in order to investigate their role in explaining wage inequality among workers, as well as aggregate production. In particular, we consider a simplified version of the model by Calvó-Armengol and Jackson (2003), in which information about heterogeneous jobs arrives at heterogeneous agents randomly. We...
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