Friends Networks and Job Finding Rates

Searching for a job involves the acquisition of information about available employment opportunities, and this requires time and effort. Social networks have been considered an important source of information for job seekers by economists and sociologists for a long time. In this paper, we investigate the importance of network effects in the labor market exploiting information on close friends. We construct a measure of the quality of the network based on friends’ employment status using information from the British Household Panel Survey (BHPS) on each of the respondent’s three best friends and their characteristics. The focus of our empirical analysis is to identify the effect of friends’ employment on individual’s job finding rates. There are three main contributions of our study. To the best of our knowledge, this is the first paper that uses direct information on social interactions in estimating their effect on labor market outcomes. Unlike previous research, our definition of ‘peers’ does not rely on the assumption that individuals within a given group – e.g. neighbourhood or firm – interact with each other and are members of the same network, which is non-testable. The second contribution is that our study provides empirical evidence on alternative mechanisms through which social interactions might operate. We consider three ways in which peers might affect job finding probabilities: by transmitting information on available jobs, by exerting pressure due to social norms, or through the existence of leisure complementarities. The third contribution is that we can separate the effect of friendship networks from that of family networks. We provide evidence that employed friends increase the probability of finding a job. An additional employed friend increases the job finding probability by as much as 13 percent or 3.3 percentage points. In addition, having all friends employed compared to no employed friends leads to the greatest effects, which suggests the presence of competition among the contacts. These results are robust to alternative analytical strategies. We also investigate the impact of friends’ networks on labor market outcomes other than employment transitions, finding that employed friends are associated with higher wages and more stable matches upon re-employment. We use this evidence and additional findings on the effects of friends’ employment on life satisfaction and satisfaction with leisure to conclude that the network effects are due to information transmission rather than to alternative mechanisms such as pressure due to social norms and leisure complementarities. Finally, we provide evidence which suggests that it is the behaviour of the contacts in the network rather than their characteristics that matters and that friends’ networks matter above and beyond family networks. This has relevant policy implications, since the transmission of information through social interactions may act as a social multiplier of labour market programs.