The Impact of Social Segregation on the Labor Market Outcomes of Low‐Skilled Workers*

Abstract

We study the impact of network homophily on labor market outcomes in a search‐and‐matching model with two job search channels: the formal market and social contacts. There are two worker types: low‐skilled and high‐skilled workers. The homophily level determines whether the referral networks of the two types are mixed or segregated from each other. We show that there exists an intermediate homophily level that minimizes the unemployment rate and maximizes the wages of low‐skilled workers. Complete integration does not maximize the welfare of low‐skilled workers, unless it improves their productivity. We argue that our model can explain the empirical findings on the labor market effects of the Moving‐to‐Opportunity experiment and the integration of immigrants.