Referral Hiring and Social Network Structure

TL;DR

This paper investigates how social network structures, especially heterogeneity in degree distribution, influence economic inequality and labor market outcomes, revealing that scale-free networks can disadvantage certain worker groups and that referral policies may worsen inequality.

Contribution

It demonstrates that social network heterogeneity impacts inequality and labor market disparities, highlighting the effects of scale-free networks and policy implications.

Findings

Scale-free networks disadvantage certain worker groups.

Increasing skewness in degree distribution worsens inequality.

Discouraging referral hiring can reduce social welfare.

Abstract

It is well known that differences in the average number of friends among social groups can cause inequality in the average wage and/or unemployment rate. However, the impact of social network structure on inequality is not evident. In this paper, we show that not only the average number of friends but also the heterogeneity of degree distribution can affect inter-group inequality. A worker group with a scale-free network tends to be disadvantaged in the labor market compared to a group with an Erd\H{o}s-R\'{e}nyi network structure. This feature becomes strengthened as the skewness of the degree distribution increases in scale-free networks. We show that the government's policy of discouraging referral hiring worsens social welfare and can exacerbate inequality.