On the Puzzle of Diversification in Social Networks with Occupational Mismatch

Center for Mathematical Economics (IMW) Working paper Nr. 547

33 Pages Posted: 8 Nov 2015

See all articles by Anna Zaharieva

Anna Zaharieva

Bielefeld University - Department of Business Administration and Economics

Date Written: October 26, 2015

Abstract

This paper incorporates social networks into a frictional labour market framework. There are two worker types and two occupations. Both occupations are subject to correlated business cycle fluctuations in labour demand. The equilibrium in this model is characterized by occupational mismatch which is associated with a wage penalty. This paper shows that there exists a unique value of network homophily maximizing the present value of income. Therefore, there is a gain for risk-neutral workers if their network is diversified between the two occupations. The reason for diversification is that the present value of income is a non-linear function of the network composition. Thus, it is not the desire to reduce the volatility of income as in standard portfolio theory which is driving the decision of workers. Nevertheless, the optimal diversification level is higher with stronger negative correlation in labour demand between the two occupations, with a lower unemployment benefit and with a higher probability of recession in the primary occupation. On the other hand, the optimal diversification level is reduced if there is on-the-job search in the state of mismatch.

Keywords: Occupational mismatch, social networks, homophily, diversification

JEL Classification: J23, J31, J64

Suggested Citation

Zaharieva, Anna, On the Puzzle of Diversification in Social Networks with Occupational Mismatch (October 26, 2015). Center for Mathematical Economics (IMW) Working paper Nr. 547, Available at SSRN: https://ssrn.com/abstract=2687442 or http://dx.doi.org/10.2139/ssrn.2687442

Anna Zaharieva (Contact Author)

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

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

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