Network Effects and the Black-White Wage Gap

Abstract

We study the impact of segregation in social networks on the disparities in labor market outcomes between Black and White workers. We provide a dynamic search and matching model of the labor market where we incorporate two kinds of network effects: i) job finding through social contacts and ii) transmission of work norms by network neighbors. When considering the first type of network effect, an increase in the level of social segregation leads to higher unemployment rates and lower wages for both the Black and White worker groups. At the same time, inter-group disparities increase, however, social segregation can account for only a negligible share of the Black-White residual wage gap.When studying the norm transmission role of social networks, the model is able to explain the whole residual wage gap, however, predicts a negative relationship between the level of social segregation and the wage gap, which contradicts the empirical evidence. We show that combining the two kinds of network effects can account for both the empirically observed magnitude of the Black-White wage gap and it's increasing pattern in the level of social segregation. We use this latter model version to study the impact of policy changes on the inter-group inequality.