On the optimal diversification of social networks in frictional labour markets with occupational mismatch

an article by Anna Zaharieva (Bielefeld University, Germany) published in Labour Economics Volume 50 (March 2018)

Highlights

• This paper considers a search model with two worker types, two occupations and networks.
• Network homophily is defined as a fraction of contacts of the same occupational type.
• Stronger homophily leads to less occupational mismatch but raises unemployment.
• Optimal network diversification is stronger with negatively correlated output shocks.
• On-the-job search and lower wages in the mismatch occupation lead to less diversification.

Abstract

This paper incorporates social networks into a frictional labour market framework.

There are two worker types and two occupations, which are subject to correlated fluctuations in output. The equilibrium is characterized by occupational mismatch which is associated with a wage penalty.

Every worker has a fixed number of social contacts in the network. The fraction of contacts of the same occupational type defines homophily of the social network, so this paper investigates the optimal level of network homophily.

Workers are risk-neutral and take aggregate variables as given, so their optimal individual choice is full homophily.

This is different from the social planner's perspective. The planner internalizes external effects of workers' network choices on aggregate variables, so there exists a unique interior value of network homophily maximizing the present value of income.

On the one hand, higher homophily is associated with lower occupational mismatch.

But on the other hand, higher homophily separates the two groups of workers, prevents exchange of information about open vacancies, and leads to more unemployment, especially in recessions.

So it is the trade-off between these two effects and not the desire to reduce income volatility, as in standard portfolio theory, which gives rise to network diversification.

Comparative statics shows that optimal network homophily is lower and diversification is stronger with a lower wage penalty from mismatch, lower unemployment benefit and negative correlation in output fluctuations.

JEL classification: J23, J31, J64

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Is the housing market blind to religion? A perceived substitutability approach to homophily and social integration

an article by Nema Dean (University of Glasgow, UK) and Gwilym Pryce (University of Sheffield, UK) published in Urban Studies Volume 54 Issue 13 (2017)

Abstract

Housing markets are unlikely to be impervious to the preferences and prejudices associated with urban segregation.

For example, two neighbourhoods with very different religious attributes are unlikely to be perceived as close substitutes by homebuyers that have a strong preference for neighbours of a particular religion.

This paper offers a new framework for the conception and measurement of social integration, defined in terms of perceived homophily. Homophily is the tendency for links to form between similar nodes in a network and we can think of perceived homophily as the tendency for any pair of neighbourhoods to be considered by the housing market to be close substitutes.

Textbook economic theory suggests that we should expect the degree of perceived substitutability to affect cross-price elasticities. These can be measured empirically to reveal discontinuities in the network of perceived substitutability of different housing locations. Applying homophily coefficients to substitutability measures allows us to estimate perceived religious homophily between neighbourhoods.

The approach can be applied to any city or region that has geocoded house transactions and socio-demographic data. We illustrate the method using data on Glasgow and find strong evidence of religious homophily.

This suggests an underlying lack of social integration/cohesion and implies that the Glaswegian housing market is by no means blind to religion.

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