Abstract: It is wellknown that 50% or more of all jobs are obtained through informal channels i.e.
connections to family or friends. As well, statistical studies show that observable individual
factors account for only about 50% of the very wide variation in earnings. We seek to explain
these two facts by assuming that the linking of workers and firms is mediated by limited network
connections. The model implies that essentially similar workers can have markedly different
wages and further that the inequality of wages is partly explained by variations in the sizes
of workers' networks. Our results indicate that differences in the number of ties can induce
substantial inequality and can explain roughly 15% of the unexplained variation in wages. We
also show that reasonable differences in the average number of links between blacks and whites
can explain the disparity in black and white income distributions.
Keywords: Wages, labor markets, social networks, inequality
Full paper (189 KB PDF)
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Last update: August 18, 2004
