DP13672 Social Connections and the Sorting of Workers to Firms
The literature on social networks often presumes that job search through (strong) social ties leads to
increased inequality by providing privileged individuals with access to more attractive labor market
opportunities. We assess this presumption in the context of sorting between AKM-style person and
establishment fixed effects. Our rich Swedish register data allow us to measure connections between
agents – workers to workers and workers to firms – through parents, children, siblings, spouses,
former co-workers and classmates from high school/college, and current neighbors. In clear contrast
with the above presumption, there is less sorting inequality among the workers hired through social
networks. This outcome results from opposing factors. On the one hand, reinforcing positive sorting,
high-wage job seekers are shown to have social connections to high-wage workers, and therefore to
high-wage firms (because of sorting of workers over firms). Furthermore, connections have a causal
impact on the allocation of workers across workplaces – employers are much more likely to hire
displaced workers to whom they are connected through their employees, in particular if their social
ties are strong. On the other hand, attenuating positive sorting, the (causal) impact is much stronger
for low-wage firms than it is for high-wage firms, irrespective of the type of worker involved, even
conditional on worker fixed effects. The lower degree of sorting among connected hires thus arises
because low-wage firms use their (relatively few) connections to high-wage workers to hire workers
of a type that they are unable to attract through market channels.
