Social Networks in Determining Employment Patterns, Dynamics, and Inequality,” mimeo Calte.pdf

Social Networks in Determining Employment: Patterns, Dynamics, and Inequality ∗ Antoni Calv´o-Armengol† and Matthew O. Jackson‡ October 2001 Revision: April 22, 2003 Abstract We develop a model where agents obtain information about job opportunities through an explicitly modeled network of social contacts. We show that employment is positively correlated across time and agents. Moreover, unemployment exhibits persistence in the sense of duration dependence: the probability of obtaining a job decreases in the length of time that an agent has been unemployed. Finally, we examine inequality between two groups. If staying in the labor market is costly (in opportunity costs, education costs, or skills maintenance) and one group starts with a worse employment status, then that group’s drop-out rate will be higher and their employment prospects will be persistently below that of the other group. Keywords: Networks, Labor Markets, Employment, Unemployment, Inequality, Drop-Out Rates, Duration Dependence. JEL Classification Numbers: A14, J64, J31, J70. ∗We thank Valentina Bali, Kim Border, Antonio Cabrales, Janet Currie, Isa Hafalir, Eddie Lazear, Massimo Morelli, David P´erez-Castrillo, and Giorgio Topa for helpful conversations and discussions. We also thank seminar participants as well as Douglas Bernheim and Preston McAfee and three anonymous referees for their comments and suggestions. We gratefully acknowledge the financial support of Spain’s Ministry of Education under grant SEC2001-0973 and the Lee Center for Advanced Networking at Caltech. †Universitat Aut`onoma de Barcelona, Department of Economics, Edifici B, 08193 Bellaterra (Barcelona), Sp