Social Contacts and Occupational Choice

Social contacts help workers to find jobs, but those jobs need not be in the occupations where workers are most productive. Hence social contacts can generate mismatch between a worker?s occupational choice and their comparative productive advantage. Thus economies with dense social networks can exhibit apparently low labour force quality and, as a result, low returns to firms? investment and depressed aggregate productivity. We employ US and European data for the 1990?s to test the key prediction that social contacts distort workers? occupational choices in a direction that reduces their apparent productivity. We find that the use of social contacts helps find jobs one to two months sooner but leads to individual wage discounts of 5% to 7% and produces negative externalities on aggregate productivity.