On-the-Job Search and Finding a Good Job Through Social Contacts

The interactions between on-the-job search and finding a job through social contacts are investigated in a Diamond-Mortensen-Pissarides search model with heterogeneous wages. Workers may find a job through their social contacts and on the formal market. The presence of social contacts increases the overall welfare in society as it rises the number of worker earning high wages and decreases the unemployment rate. However, unemployed workers finding a job through social ties earn lower wages on average than those who obtain a job on the formal market. This result follows from on-the-job search: employed workers pass only those offers on to their neighbors that pay (weakly) lower wages than their current wages earned. Despite the wage discount, unemployed workers still might find it beneficial to search via social ties because arrival rate of offers is higher for this channel than for the formal market when the number of neighbors is sufficiently large. There is a trade-off between unemployment duration and wages for workers obtaining a job via social ties