A Select Group of Friends - the Returns to Social Networking

Abstract

Most labor models predict that networking or the use of personal contacts to find a job will be associated with wage premiums and shorter unemployment durations. While empirical studies have confirmed that networkers find jobs faster, most have not confirmed the theoretically predicted wage premium. In fact, some find evidence of a wage penalty. There is scant theory to explain these findings. I develop a general equilibrium search model with worker heterogeneity that allows workers and firms to make optimal choices about how to search for matches. Since low ability job seekers may use personal contacts intensively, networked jobs may offer lower wages on average even though networkers earn a wage premium conditional on skills. Whether the use of personal contacts is correlated with wage premiums or penalties depends on employer type. I find evidence that networkers are negatively selected in the U.S. labor market using panel data from the National Longitudinal Survey of Youth (NLSY), and that the use of personal contacts is positively associated with wages. Furthermore, networking appears to impact labor market outcomes differently for different occupational groups.