Limited Network Connections and the Distribution of Wages

17 Pages Posted: 20 Dec 2004

See all articles by Kenneth J. Arrow

Kenneth J. Arrow

Stanford University - Department of Economics

Ron Borzekowski

Amazon Web Services

Date Written: August 2004

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 markets, social networks, inequality

JEL Classification: J31, D83, D31

Suggested Citation

Arrow, Kenneth J. and Borzekowski, Ron, Limited Network Connections and the Distribution of Wages (August 2004). FEDS Working Paper No. 2004-41. Available at SSRN: https://ssrn.com/abstract=632321 or http://dx.doi.org/10.2139/ssrn.632321

Kenneth J. Arrow

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Ron Borzekowski (Contact Author)

Amazon Web Services ( email )

Seattle, WA 98144
United States

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