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Limited network connections and the distribution of wages

Kenneth Arrow and Ron Borzekowski

No 2004-41, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: It is well-known that 50% or more of all jobs are obtained through informal channels i.e. connections to family or friends. As well, statistical studies show that observable individual factors account for only about 50% of the very wide variation in earnings. We seek to explain these two facts by assuming that the linking of workers and firms is mediated by limited network connections. The model implies that essentially similar workers can have markedly different wages and further that the inequality of wages is partly explained by variations in the sizes of workers' networks. Our results indicate that differences in the number of ties can induce substantial inequality and can explain roughly 15% of the unexplained variation in wages. We also show that reasonable differences in the average number of links between blacks and whites can explain the disparity in black and white income distributions.

Keywords: Wages; Labor market (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-ltv
Date: 2004
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