Social Networks, Job Search Methods and Reservation Wages: Evidence for Germany

Marco Caliendo1, Ricarda Schmidl 1, Arne Uhlendorff2
1Institute for the Study of Labor (IZA), Germany, 2University of Mannheim, Germany

In this paper we analyze the relationship between social networks and job search behavior of unemployed individuals. It is assumed that networks convey useful information in the job search process so that individuals with larger networks should experience a higher productivity of informal search. Hence, job search theory suggests that individuals with larger networks use informal search channels more often than others and substitute from formal search towards informal search. Also, due to the increase in search productivity it is likely that individuals set higher reservation wages. We investigate these relations in an empirical analysis, using the IZA Evaluation Dataset. This extensive data set contains information on unemployed individuals interviewed shortly after their entry into unemployment. Our findings confirm theory in that individuals with larger networks use informal search channels more often and substitute formal search intensity for informal search. We find that informal search is mainly considered a substitute for passive, less cost intensive search channels. The effect of networks on reservation wages seems not very pronounced for the network indicators used, however strong differences exist for individuals with heterogeneous educational attainment. In the second step of our analysis we relate these findings to labor market outcomes up to one year after entry into unemployment.

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