Social Welfare and Wage Inequality in Search Equilibrium with Personal Contacts

Posted: 11 Feb 2014

See all articles by Anna Zaharieva

Anna Zaharieva

Bielefeld University - Department of Business Administration and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

This paper incorporates job search through personal contacts into an equilibrium matching model with a segregated labor market. Firms can post wage offers in the regular job market, alternatively they can save on advertising costs and rely on word-of-mouth communication. Wages are then negotiated ex-post between the firm and the applicant, so the model can generate wage premiums or penalties depending on the parameter of bargaining power. Moreover, this paper shows that the traditional Hosios (1990) condition continues to hold in an economy with family contacts but it fails to provide efficiency in the economy with weak ties. There are two reasons for the inefficiency. First, workers bargaining over wages do not internalize the positive external effect on their contacts, originating from a higher probability of finding a job. This network externality puts an upward pressure on wages so the market tightness in the referral market is distorted downwards. Second, weak ties do not act in full interest of the unemployed worker so their search intensity is inefficiently low. Finally, this paper shows that a combination of a hiring subsidy and a referral bonus can decentralize the efficient allocation in the economy with weak ties.

Keywords: Personal contacts, Referrals, Family job search, Social capital, Wages, Equilibrium efficiency

JEL Classification: J23, J31, J64, D10

Suggested Citation

Zaharieva, Anna, Social Welfare and Wage Inequality in Search Equilibrium with Personal Contacts (August 2013). Labour Economics, Vol. 23, 2013, Available at SSRN: https://ssrn.com/abstract=2393404

Anna Zaharieva (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
200
PlumX Metrics