Occupational Mismatch and Social Networks

A labor market model with heterogeneous workers and jobs is provided to investigate the effects of social networks as a job information channel regarding the level of mismatch between workers and firms. I compare the efficiency in producing good matches of the formal market to that of social networks. I assume that links between workers represent favoring relationships: workers recommend each other for any kind of jobs irrespective of resulting match quality. I show that as the probability that ties connect similar agents (homophily) increases, the mismatch level decreases in society. If this probability is sufficiently high, networks provide good matches at a higher rate than the formal market, for any efficiency level of the market. In this case the mismatch level is lower in society with social networks than it would be in a pure market economy. Hence, the presence of social networks can reduce mismatch despite favoritism. I discuss implications of mismatch creation for the expected wages of jobs obtainable through different search methods