“Network Effects and the Black-White Disparities in the Labor Market”

Gergely Horvath, Xian Jiaotong Liverpool University 

It has been previously argued that the social isolation of Black workers limits their access to job information and contributes to their labor market disadvantages, desegregation would thus reduce the Black unemployment rate. We present a search and matching model whereby workers can obtain job information on the formal market and using their social contacts. We show that segregation has a non-monotonic impact on the labor market outcomes (wages, unemployment) of Black workers. There exists an optimal segregation level that minimizes the Black unemployment rate and maximizes wages and welfare obtained by Black workers. The optimal network is much more segregated than a random network where Black and White workers completely mix. This is because at low segregation levels, White contacts are less likely to provide job information as they have more unemployed friends which increases the competition for the information possessed by them. Black workers can thus increase their job finding chances by connecting to Black, and not to White workers. Further, we show that the policy measures that decrease the Black unemployment rate also increase the optimal segregation level and in this way may contribute to the conservation of segregation.