DP2797 Job Matching, Social Network and Word-of-Mouth Communication

Author(s): Antoni Calv├│-Armengol, Yves Zenou
Publication Date: May 2001
Keyword(s): Job Search, Microfoundation of the Matching Function, Personal Communication, Social Network
JEL(s): D83, J64
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2797

In our model, workers are embedded within a network of social relationships and can communicate through word-of-mouth. They can find a job either through formal agencies or through informal networks of contacts (word-of-mouth communication). From this micro scenario, we derive an aggregate matching function that has the standard properties but fails to be homogenous of degree one. The latter is due to negative externalities generated by indirect acquaintances (contacts of contacts) that slow down word-of-mouth information transmission, especially in dense networks. We then show that there exists a unique labour market equilibrium and that, because of these negative externalities, the equilibrium unemployment rate increases with the network size in dense networks.