Document Type

Working Paper

Publication Date

2011

Abstract

This paper investigates the effect of firm owners and coworkers on hiring patterns and wages. Firstly, I explore the potential mechanisms generating their interrelation. Using a search model where social networks reduce search frictions, I develop the theoretical implications of social ties between owners and workers for individual labor market outcomes. In the model, wages are derived endogenously as a function of the efficiency of the social ties of current employees. Firms decide whether to fill their vacancies by posting their offers or by using their current workers’ connections. As a result, individuals with a more efficient connection tend to receive higher wages. These findings highlight the potential importance of social connections and social capital for understanding employment opportunities and wage differentials. Secondly,using a unique matched sample from an employer-employee administrative database and a survey of characteristics of small firm owners, I analyze the impact of the birthplace of employers and individual coworkers (native versus immigrant) on firm hiring patterns and average log wages. First, I explore the effect of owner type on the composition of new hires. The results show that firms with immigrant owners are more likely to hire immigrant workers. Moreover, among immigrant owners, this prevalence is especially strong for Hispanic and Asian workers. I also find that the probability that a new hire is a native, non-Hispanic white or black is higher for native firms. Second, I estimate the impact of owners and coworkers place of birth on wage differentials across worker types, controlling for workers’ human capital. The results illustrate that much of the difference between the log annual wage of immigrants and natives comes from immigrants’ propensity to work in non-native owned firms, which pay the lowest average wages. Interestingly, though, native workers holding a job in immigrant firms are paid less than immigrant workers. The paper concludes by discussing the extent to which the empirical findings can account for the model.

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Economics Commons

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