Research Summary
Research Summary
Social Networks and Unraveling in Labor Markets
Description
This paper develops a model of local unraveling (or early hiring) in entry-level labor markets. Information about workers' productivity is revealed over time and transmitted credibly via a two-sided network connecting firms and workers. While employment starts only after workers finish their formal training, firms and workers can sign an enforceable future employment contract at any time. By considering network based information flows and more than one period of unraveling, we modify results from less general models that predict that increasing efficiency in the post-graduation market leads to a decrease in unraveling and show that it might lead to an increase in unraveling. A more thorough investigation finds that unraveling increases in the span of network, in network concentration around a subset of workers, and in early information accuracy. Unraveling decreases in network concentration around a subset of firms. Network density increases unraveling when the network is sparse, but decreases unraveling in dense networks. The model also predicts earlier unraveling by workers that are connected to firms of heterogeneous qualities and by firms that are connected to less workers. Finally, we analyze the effects of unraveling on market outcomes and welfare and evaluate different policies with respect to their effect on unraveling.