This dissertation studies the impact of social networks on social welfare and wage inequality

in a labour market with search and matching frictions. Social contacts are considered in the

sense of information transmission about vacancies from employed to unemployed workers (social

capital). The main chapters of this thesis are based on three independent articles. Chapters 2

and 3 are joint works with J.-Prof. Dr. Anna Zaharieva.

Chapter 2 is a revised version of the IMW working paper No. 491 with the same title.

This paper develops a search model with heterogeneous workers and social networks. High

ability workers are more productive and have a larger number of professional contacts. Firms

can choose between a high cost vacancy in the regular market and a low cost job opening in

the referral market. The model predicts that a larger number of social contacts is associated

with a larger wage gap between high and low ability workers and a larger difference in the

equilibrium unemployment rates. The net welfare gain of referrals is estimated at 1.2%. Next

we demonstrate that the decentralized equilibrium with referrals is inefficient for any value of the

bargaining power. There are two reasons for the inefficiency. First, the private gain from creating

a job in the referral market is always below the social gain, so the equilibrium unemployment of

high ability workers is above its optimum. Moreover, high ability workers congest the market for

low ability workers, so the equilibrium wage inequality is inefficiently large. This is in contrast

to the result of Blazquez and Jansen (2008) showing that the distribution of wages is compressed

in a search model with heterogeneous workers. Finally, we show that a combination of transfers

and subsidies can restore the optimal allocation. If this policy is implemented the net welfare

gain of referrals rises up to 1.8%.

Chapter 3 is a paper published in the Journal of Economic Behavior and Organization 119

(2015), pp. 211-233 (doi:10.1016/j.jebo.2015.08.012) with the same title. This paper presents

a search model with heterogeneous workers, social networks and endogenous search intensity.

There are three job search channels available to the unemployed: costly formal applications

and two costless informal channels - through family and professional networks. Low productivity

workers expect low wages implying low incentives for preparing formal job applications.

Hence low productivity workers rely on family referrals as a method of last resort. In contrast,

professional referrals are used by firms to hire high productivity employees. Formal hiring is

then a most frequent employment channel for workers in the middle range of the productivity

distribution. This explains a U-shape referral hiring pattern observed in empirical studies and

a strong selection of workers on productivity across the three channels. Moreover, combining

family and professional referrals into one informal channel may generate a spurious result of

wage premiums (penalties) if high (low) productivity workers are dominating in the empirical

data and their productivity is not fully observable to the econometrician.

Chapter 4 is the IMW working paper No. 548 with the same title. In this paper, the

search model is proposed, in which homogeneous firms are uncertain about the job seekers’

number of friends, who can help them in the job search (social capital). All workers have the

same productivity and differ only in the social capital. A firm offers a take-it-or-leave-it wage

contract to a worker after checking the worker’s profile and her public number of non-fictitious

social contacts in the Social Network System in the Internet. This number serves as a noisy

signal of the social capital for firms and cannot be influenced by the worker only for signalling

purpose. The model generates a positive relationship between the number of contacts in the

Social Network System and the wage offered by firms in the equilibrium. In addition, the

presence of firm’s uncertainty with respect to workers’ possibilities to find jobs through social

contacts increases overall social welfare.