Friends in Low Places: Network Capital and the Scarring of Labor Markets

Joseph Kopecky ()
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Joseph Kopecky: Department of Economics, Trinity College Dublin

Economic Papers from Trinity College Dublin, Economics Department

Abstract: Why do deep recessions scar labor markets long after their shocks fade? Networks of employed contacts, built by employment, eroded by unemployment, are a depreciable capital stock that no one owns. I build this stock into a heterogeneous‐agent model of the U.S. labor market, disciplined by three decades of CPS data on cyclical job‐search behavior. In a calibrated China‐shock experiment, the network accounts for a quarter to a third of the employment scar, concentrated on low‐wealth workers. Its destruction is an unpriced externality; a state‐contingent hiring credit corrects it cheaply in this economy and dominates equal‐cost unemployment insurance.

Keywords: social networks; referral hiring; network capital; scarring; hysteresis (search for similar items in EconPapers)
JEL-codes: D62 D85 E24 E32 J64 J68 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2026-08
New Economics Papers: this item is included in nep-soc
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