The Role of Professional Networks and Firm Hierarchies for Individual Careers and Wage Inequality
Final Report Abstract
In this project we analyzed optimal promotion decisions of hierarchical firms as well as the impact of social and professional networks for the career development of heterogeneous workers and aggregate labour market outcomes. In particular, this project developed a series of labour market models with 3-4 levels in the hierarchical job ladders, where workers can progress in their careers by means of internal promotions within firms but also external moves between employers. Internal promotion times are endogenously determined by competing firms and partially depend on the decisions of competitors and the aggregate labour market situation. In the benchmark setting of the model with homogeneous workers we show that there exists a unique stable symmetric general equilibrium. We find that promotion decisions of firms are strategic complements, meaning that a firm has incentives to delay promotions of its junior workers if other firms in the market follow this strategy. Considering a labour market with heterogeneous workers, we find that high skill workers should be promoted earlier in line with the available empirical evidence. Moreover, stronger competition among firms leads to earlier promotions of the low skilled, but the effect for high skilled workers has an inverse U-shape relationship with the number of firms in the market. Further, the benchmark model is modified to account for the possibility of filling positions by referrals in addition to formal applications. This means that senior workers situated in higher hierarchical positions can provide recommendations to applicants from their social networks for open positions in the firm. More specifically, we study the application of this model to the problem of the glass-ceiling interpreting the two heterogeneous worker groups as male and female workers. Here we find that when female workers are a minority in the occupation and social link formation is genderbiased (homophily) there are too few female contacts in the social networks of their male colleagues. This disadvantage implies that female workers are referred less often and, thereby, become under-represented in top level management positions of firms. Our results suggest that endogenously forming homophilous social networks when female workers are the minority can explain a substantial part of the empirically observable gender wage gap stemming from the glass-ceiling effect. Finally, we study the impact of social networks on intergenerational mobility. The reason is that social/professional networks of parents may have an impact on the expectations of their children. When modeling the networks of parents we take into account a common empirical fact that social network formation is subject to skill homophily, meaning that individuals coming from the same skill group are more likely to form social links. In a labour market with a binary skill structure this leads to a situation when high skill friends are overrepresented in the social networks of high skill parents, whereas friendship ties with low skill workers are less common in high skill families. The opposite is true for low skill parents. In this setting we show that social networks of high skill parents are more balanced between the two skill groups, thus they possess more precise information about the market skill premium. Intuitively, this means that expectations about the skill premium are less dispersed across high skill families, and so children in these families are more likely to acquire higher education. This mechanism gives rise to a positive correlation in the schooling outcomes of parents and children also if other traditional explanations of intergenerational mobility are not taken into account.
Publications
- (2018) “Social Networks, Promotions and the Glass-Ceiling Effect”, Bielefeld Working Papers in Economics and Management 07-2018
Neugart M., A. Zaharieva
(See online at https://doi.org/10.4119/unibi/2930995) - (2018) „On the optimal diversification of social networks in frictional labour markets with occupational mismatch”, Labour Economics 50, 112-127
Zaharieva A.
(See online at https://doi.org/10.1016/j.labeco.2017.04.002) - (2019) „Professional careers, promotions and organizational hierarchies in a frictional labour market“, Bielefeld Working Papers in Economics and Management 03-2019
Dawid. H., M. Mitkova, A. Zaharieva
(See online at https://doi.org/10.4119/unibi/2934690) - (2020) “Formal search and referrals from a firm’s perspective”, International Economic Review 61 (4), 1679-1748
Rebien M., M Stops, A Zaharieva
(See online at https://doi.org/10.1111/iere.12477) - (2020) “Social optimum in a model with hierarchical firms and endogenous promotion time”, working paper, University of Bielefeld
Mitkova M.
