Social Networks as a Mechanism for Discrimination

Abstract: I study labor markets in which firms hire via referrals. I develop an employment model showing that--despite initial equality in ability, employment, wages, and network structure--minorities receive fewer jobs through referral and lower expected wages, simply because their social group is smaller. This disparity, termed "social network discrimination," falls outside the dominant economics discrimination models--taste-based and statistical. Social network discrimination can be mitigated by minorities having more social ties or a "stronger-knit" network. I calibrate the model using a nationally-representative U.S. sample and estimate the lower-bound welfare gap caused by social network discrimination at over four percent, disadvantaging black workers.