How do people find jobs? Can we rely on education and degrees to find a job or does it also depend on whom we know? In many economic situations, individuals do not act autonomously but as members of social networks. In a recent Barcelona Graduate School of Economics working paper (No. 731) (November 2013), Albrecht Glitz asks whether and to what extent a worker’s labor market outcomes are affected by the social network in which he or she is embedded.

Theoretical framework: the role of social networks

The empirical analysis in this paper builds on a theoretical framework in which the primary role of social networks in the labor market is to increase the arrival rate of job offers (e.g., Calvó-Armengol and Jackson 2004, 2007). The intuition is that individuals hear about job opportunities and pass this information on to their unemployed social contacts if they do not need it themselves. Since many such social contacts are work-related (Granovetter 1995), unemployed agents who are embedded in a large network of former co-workers characterized by a high employment rate should be more likely to find a new job than workers embedded in a network characterized by a low employment rate.

Empirical analysis

The author uses establishment closures to identify a sample of workers who simultaneously start searching for a new job. He studies how the prevailing employment rate in a displaced worker’s network of former coworkers at the time of displacement affects the worker’s re-employment probability and wage in the year after displacement. The ideas is that if the firm you work for closes down, but all your former colleagues that are not working for the firm when it closes down are still employed, then you will be the first to know if a position opens up at their workplace.

Using data describing the entire work histories of the workers in four large metropolitan areas in Germany, the author defines a given worker’s network as the group of all coworkers with whom he worked together in the same establishment at some point during the previous five years. In order to account for the possibility that the relationship between the network employment rate and a worker’s outcomes after loosing a job is due to unobserved factors shared between network members, the author exploits past mass-layoffs as an exogenous shock to the employment rate in a worker’s network. In addition to this instrumental variable, the author controls for establishment fixed effects and a comprehensive set of control variables, thereby allowing a causal interpretation of the results.

Empirical results of strong coworker-based networks

The empirical results show that networks of coworkers are an important feature of the labor market. Forming part of a stronger network has a positive effect on the employment probability in the year after displacement but no effect on starting wages in the new job. A 10 percentage point increase in the employment rate of a worker’s network of former coworkers at the time of displacement increases the reemployment probability in the following year by 7.5 percentage points.

Implications and long-run effects

Although statistically inconclusive, the results indicate that low-educated workers, immigrant workers, young workers, and workers employed in medium-sized firms benefit relatively more from increases in the employment rate in their networks. Among the group of former coworkers, female coworkers, coworkers from the same age cohort as the displaced workers, and coworkers with whom prior interaction was more intensive are particularly important for employment outcomes after having been displaced.

Looking at the longer run effects reveals that the positive impact on the employment probability of a displaced worker only persists for the first years after displacement.

Overall, the findings of this study suggest that a strong network of coworkers provides valuable information about labor market opportunities and can serve as a useful resource to accelerate the transition out of unemployment in times of economic distress. So bear in mind when you go to work tomorrow that if you at some future point in time loose your job, it might be your current colleagues who will help you find a new job. Unfortunately, they do not seem to help you earn more money.

References

Calvó-Armengol, A. and M. O. Jackson (2004). The effects of social networks on employment and inequality. American Economic Review 94 (3), 426-454.

Calvó-Armengol, A. and M. O. Jackson (2007). Networks in labor markets: Wage and employment dynamics and inequality. Journal of Economic Theory 132 (1), 27-46.

Granovetter, M. S. (1995). Getting a Job: A Study of Contacts and Careers (2 ed.). University of Chicago Press.