Social Interactions and Unemployment
Uppsala University Economics Working Paper No. 2003:18
36 Pages Posted: 13 Oct 2003
Date Written: June 2003
This paper is concerned with social interactions and their importance for unemployment. A theoretical model is specified in which the social and psychological costs of unemployment depend upon the unemployment level. The theoretical analysis reveals social multiplier effects, and shows that multiple unemployment equilibria may emerge. Data on all 20- to 24-year-olds living in the Stockholm metropolitan area during the 1990s are used to test key hypotheses derived from the model. The focus is on the role of neighborhood-based reference groups, and the results support the theoretical predictions: unemployment levels vary more across neighborhood-groups than what would be expected based on variation in observable characteristics, and individuals' transition rates out of unemployment appear to be strongly influenced by the unemployment level within their neighborhood-based reference groups.
Keywords: Social interactions, social norms, social multipliers, unemployment
JEL Classification: J64, Z13
Suggested Citation: Suggested Citation