Labor Market Networks and Recovery from Mass Layoffs: Evidence from the Great Recession Period

Abstract

We measure the impact of labor market referral networks defined by residential neighborhoods on re-employment following mass layoffs. Because networks can only be effective when hiring is occurring, we focus on a measure of the strength of the labor market network that includes not only the number of employed neighbors of a laid off worker, but also the gross hiring rate at that person's neighbors' workplaces, as network theory suggests that employed neighbors in a network serve to increase the probability that, for any given job opening, an unemployed job searcher will be hired into that vacancy. We find some evidence that local labor market networks are linked to re-employment following mass layoffs, but our strongest evidence shows that networks serve to markedly increase the probability of re-employment specifically at neighbors' employers, both conditional and unconditional on re-employment itself. This finding is consistent with the specific role that networks play in reducing frictions in the transmission of information in hiring. Finally, although overall employment and gross hiring both declined markedly during the Great Recession, we find little evidence of changes during this period in the productivity of networks in helping displaced workers find new jobs. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.