Referral Hiring and Social Network Structure

Abstract: It is well known that differences in the average number of friends among social groups can cause inequality in the average wage and/or unemployment rate. However, the impact of social network structure on inequality is not evident. In this paper, we show that not only the average number of friends but also the heterogeneity of degree distribution can affect inter-group inequality. A worker group with a scale-free network tends to be disadvantaged in the labor market compared to a group with an Erd\H{o}s-R\'{e}nyi network structure. This feature becomes strengthened as the skewness of the degree distribution increases in scale-free networks. We show that the government's policy of discouraging referral hiring worsens social welfare and can exacerbate inequality.