Networks in labor markets: Wage and employment dynamics and inequality

We present a model of labor markets that accounts for the social network through which agents hear about jobs. We show that both wages and employment are positively associated (a strong form of correlation) across time and agents. We also analyze the decisions of agents regarding staying in the labor market or dropping out. If there are costs to staying in the labor market, then networks of agents that start with a worse wage status will have higher drop-out rates and there will be a persistent differences in wages between groups according to the starting states of their networks. (c) 2005 Elsevier Inc. All rights reserved.