Social Interactions in the Labor Market

116 Pages Posted: 4 Sep 2011

See all articles by Andrew Grodner

Andrew Grodner

East Carolina University - Department of Economics

Thomas J. Kniesner

Claremont Graduate University - Department of Economic Sciences; Syracuse University - Department of Economics; IZA

John A. Bishop

East Carolina University - College of Business

Abstract

We examine theoretically and empirically social interactions in labor markets and how policy prescriptions can change dramatically when there are social interactions present. Spillover effects increase labor supply and conformity effects make labor supply perfectly inelastic at a reference group average. The demand for a good may also be influenced by either a spillover effect or a conformity effect. Positive spillover increases the demand for the good with interactions, and a conformity effect makes the demand curve pivot to become less price sensitive. Similar social interactions effects appear in the associated derived demands for labor. Individual and community factors may influence the average length of poverty spells. We measure local economic conditions by the county unemployment rate and neighborhood spillover effects by the racial makeup and poverty rate of the county. We find that moving an individual from one standard deviation above the mean poverty rate to one standard deviation below the mean poverty rate (from the inner city to the suburbs) lowers the average poverty spell by 20-25 percent. We further consider overall labor market outcomes by examining theoretically the socially optimal wealth distribution. Interdependence in utility can mitigate the need to transfer wealth to low-wage individuals and may require them to be poorer by all objective measures. Finally, we quantify how labor market policy changes when there are household social interactions. Labor supply estimates indicate positive economically important spillovers for adult U.S. men. Ignoring or incorrectly considering social interactions can mis-estimate the labor supply response of tax reform in the United States by as much as 60 percent.

Keywords: social interactions, spillover, conformity, inequality, poverty, labor supply, reference group, social multiplier, income tax, PSID

JEL Classification: D11, J22, Z13, D31, D63

Suggested Citation

Grodner, Andrew and Kniesner, Thomas J. and Bishop, John A., Social Interactions in the Labor Market. IZA Discussion Paper No. 5934. Available at SSRN: https://ssrn.com/abstract=1922006

Andrew Grodner (Contact Author)

East Carolina University - Department of Economics ( email )

A423 Brewster Building
Greenville, NC 27858
United States
2523286742 (Phone)

Thomas J. Kniesner

Claremont Graduate University - Department of Economic Sciences ( email )

Claremont, CA 91711
United States

Syracuse University - Department of Economics ( email )

Syracuse, NY 13244-1020
United States

IZA

P.O. Box 7240
Bonn, D-53072
Germany

John A. Bishop

East Carolina University - College of Business ( email )

Department of Economics
Greenville, NC 27858-4353
United States

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