Social capital in the labor market & institutional emeddedness: organizations and the state

Problem and Solution with social capital in the labor market

Problem:

• Employees don’t know all open jobs; employers don’t know all candidates or true productivity → info gaps on both sides

• Employees also can’t know if a workplace really suits them until they try it

Solution:

• Social capital networks help fill information gaps

• strength of weak ties: weak connections (acquaintances) often provide new and useful information (hearing about a job from a friend-of-a-friend, not just family)

• Classical argument (granovetter, strength of weak ties): social networks help people find jobs and employers find candidates by sharing info that isn’t widely available

structural holes & social capital

Burt:

• structural holes: gaps between groups in a network

  • Bridging structural holes (connecting separate groups, that wouldn’t otherwise interact) gives you social capital and advantages—more unique info, more power (differs from Granovetter’s focus on weak ties)

homophily vs. Diversity

Homophily: people connect to others like themselves (same ethnicity, gender, etc.), so networks often aren’t very diverse.

Diversity: Diverse networks (bridging structural holes) gives access to new info and opportunities

Mechanisms for how social capital helps in the labor market

1. Novel information: diverse/bridging networks give access to new job info (less redundancy) → diverse network can be helpful (can be driven by weak ties)

2. Vouching: Contacts in higher positions can recommend or vouch for you—helps in hiring and career perspectives. (importance of strong ties)

3. Connections as signals: just knowing important people can make you look better to employers (signal of trust or quality) → strong and weak ties both matter

Capital deficit

Idea: helps explain why some groups have it harder in the labor market, even if they network just as much.

• some groups (e.g. women, migrants) mostly connect with people like them selves (homophily)

• If they don’t have enough connections to people in powerful positions (like men in leadership), they have less access to good opportunities—even if their networks are strong within their own group.

Ex: If a women mostly knowns other women and men control most top jobs, she has less access to leads or promotions. → not enough useful connections

Return deficit

Idea: helps explain why some groups have it harder in the labor market, even if they network just as much.

• Sometimes different groups use their social capital differently or get less out of it.

• Even with similar connections, some groups (e.g. women) get less support or benefit than others (e.g. men) from their contacts.

Ex: Studies show men’s contacts are more helpful for getting jobs or promotions than women’s, even if women have similar networks. → same connections, but less benefit from them

Does social capital explain part of the wage gap?

Motivation:

• persistent gender wage gap (UK: ~20%, still ~13% after adjusting for age, job, education)

Study:

• UK longitudinal study: observations on labor market, personality traits, and social capital.

Results:

• Social capital explains about 3 percentage points of the gender wage gap (out of ~15%)

• Most important difference: number of male friends

• only minor differences in other social capital measures

→ explains some of the reasons

Why do institutions exist?

Institutions (rules or organizations exist to solve coordination and cooperation problems in the economy, especially when transaction costs are high.

• transaction costs: “friction” in making exchanges (searching, bargaining, policing, enforcing, adapting)

• For simple deals (e.g. buying bread) costs are low.

• For complex goods (e.g. building a smartphone) costs are high - lots of contracts, information, and trust needed.

Structure society: shape who has power and resources (can create or reinforce inequalities)

Without institutions:

• many valuable g&s wouldn’t be produced because cooperation is too risky or expensive

What problems do institutions solve?

• lower transaction costs: make it easier & cheaper for people/firms to cooperate (replace open markets for some problems)

• solve coordination problems: help people organize around common rules or schedules (e.g. everyone has the same weekend-reason why unemployed and employed individuals see spikes in positive emotions during the weekend)

• enable production of complex goods: organizations (like firms) bring together people/resources under one roof to cut down costs and risks

• enforce contracts & reduce uncertainty: formal rules (laws, courts) and informal rules (trust, reputation) make people willing to cooperate and invest

types of transaction costs

• search/information costs: finding out what’s available (ex ante)

• bargaining/contracting costs: negotiating and writing agreements (ex ante)

• policing costs: making sure everyone follows the rules (ex post)

• conflict/enforcement costs: handling disputes (ex post)

• adaptation costs: adjusting when conditions change (ex post)

Examples of institutions

Organizations (e.g. Siemens, OPEC):

• replace open markets for some exchanges to manage complexity

Rules: can be formal (laws, contracts) or informal (customs, traditions)

• formal: written, enforced by courts (paying in advance, binding contracts)

• informal: unwritten, enforced by social pressure or reputation (street musician dont go to the front row in order for other people to still be able to see)

Empirical example of institutional embeddedness - Motherhood penalty

Motivation:

• significant motherhood wage gap in many countries

• organizations/institutions are often ignored in this research

→ Can firm selection explain the penalty mothers face?

Theory:

• Compensating differentials: mothers may accept lower pay for family-friendly jobs (e.g. part-time)

• Discrimination: if mothers switch employers after childbirth, they often end up in lower-paying firms

Data: Canadian employer-employee data

Results:

• mothers “pay” for family-friendly policies by accepting lower salaries

• Main reason for the penalty: gap between mothers and other women can be explainbed by the preference, not because they are directly paid less for the same work

welfare state

def.: A gov system in which the government provides a number of programs to pursue its goal of social protection on behalf of its citizens in certain categories of risk, social assistance of the needy or encouraging the consumption of services like childcare, healthcare and education.

→ all modern countries, even US, have some form of welfare state

main function: redistribute resources to support people in need

• carried out by governement agencies, local authorities, insurance or charitites

• access often based on eligibility rules

funding:

• taxes

• social security contributions

• governement borrowing

Examples:

• social insurance (health insurance, pensions)

• education (schooling, universities)

• special benefits (child benefits, paid maternity leave)

gini coeffient

numerical representation of income inequaltiy, where 0 represents full equality and 1 maximum inequality.

→ comparing coefficients before and after governmental redistribution to assess strength of the welfare state

three worlds of welfare capitalism

Liberal (USA, Australia, Canada):

• means-tested assistance (low benefit)

• Role of the family: mostly irrelevant

• low redistribution

• preference for private forms of social provision, reinforcement of markets

Conservative (Germany, France, Austria):

• retention of hierarchies

• relatively high benefit (dependent on prior contributions)

• relatively high level of state provision

• Role of family: traditional family structures

• moderate redistribution

Social democratic (Nordic countries):

• universalist

• high benefits

• state provision rather than private provision; inclusion through work

• State rather than family provision

• High redistribution

US-Germany unemployment insurance study

Motivation:

• US & Germany have different unemployment benefits

→ How do these differences affect job-finding, mobility, and income loss for the unemployed?

Theory:

• more generous unemployment insurance (UI) allows unemployed to take longer searching for better jobs, but lowers mobility

• less generous UI forces quicker re-employment, often with bigger income losses

Data: Pre-Hartz IV data from the US and Germany

→ Measures: benefit duration/coverage, job-finding rates, mobility, and post-unemployment earnings

Results:

• US: shorter benefit period (6 months), stricter rules, 40% coverage

• Germany: longer benefit period (6-32 months), 70-80% coverage

UI recipients in both countries:

• take longer to find jobs

• change jobs/occupations less

• suffer smaller earnings lossess when re-employed

System design (generosity, duration) directly impacts these labor market outcomes