Social Science Research 31 (2002)

Socal Scence Research 31 (2002) 511 538 Socal Scence RESEARCH www.academcpress.com Racal dfferences n the effects of job contacts: Conflctng evdence from cross-sectonal and longtudnal data Ted Mouw Department of Socology, Campus Box 3210, 155 Hamlton Hall, Unversty of NorthCarolna, Chapel Hll, NC 27599-3210, USA Abstract Recent research has argued that usng job contacts to fnd work restrcts the opportuntes of Black workers. Although ths makes sense n lght of lterature on urban poverty that contends that nner-cty Blacks are solated from effectve job networks, ths paper argues that there are two reasons why these fndngs may be msleadng. Frst, the exstence of dscrmnaton n the labor market means that contacts may be an effcent method of job search for Black workers. Second, because the use of contacts may be an endogenous varable, we need to look at longtudnal data. In the analyss, I compare cross-sectonal and longtudnal results on the relatonshp between contacts and wages. Whle the cross-sectonal data ndcate a negatve relatonshp between contacts and wages, the longtudnal data suggest ths merely reflects lower levels of opportunty among workers who use contacts rather than the effect of contacts per se. Ó 2002 Elsever Scence (USA). All rghts reserved. 1. Introducton One promnent theory of urban nequalty focuses on the socal solaton of nner-cty mnortes. In The Truly Dsadvantaged, Wllam Julus Wlson argues that lvng n a socally solated ghetto has negatve consequences for two reasons: the loss of postve role models for urban Blacks and ther excluson from job networks (Wlson, 1987). The mportance of role models E-mal address: tedmouw@emal.unc.edu. 0049-089X/02/$ - see front matter Ó 2002 Elsever Scence (USA). All rghts reserved. PII: S0049-089X(02)00020-0

512 T. Mouw / Socal Scence Research31 (2002) 511 538 argues for the socal-psychologcal consequences of lvng n a poor neghborhood and s plausble only f convncng evdence exsts that the work culture and motvaton of Black workers who lve n hgh-poverty neghborhoods s dfferent from those of other workers. In contrast, the lack of good job contacts s a structural consequence of the socal solaton of nner-cty neghborhoods and would exst even n the absence of psychologcal and cultural dfferences between the poor and nonpoor. Because hgh-poverty neghborhoods have low employment rates, Blacks who lve n these neghborhoods may have fewer frends and relatves who are employed and can help them fnd steady jobs. Moreover, the qualty of ther contacts may be lower than that of Whte workers because of Black/Whte dfferences even among workers who are employed (Holzer, 1987). Because of the prevalent use of contacts to fnd work between 40 and 50% of jobs are found through help or nformaton from frends or relatves (Granovetter, 1974) racal dfferences n the quantty and qualty of job contacts may result n persstent Black/Whte labor market nequalty n urban areas. Recently, a number of researchers have attempted emprcal tests of racal dfferences n the effect of job contacts on labor market outcomes for Black and Whte workers (Falcon and Melendez, 2001; Green, Tgges, and Browne, 1995, 1999; Holzer, 1987; Korenman and Turner, 1996; Olver and Lchter, 1996). A key aspect of ths research on socal solaton and urban poverty s that the socal context of the job contact s key (Olver and Lchter, 1996). Rather than focusng on the blanket effect of usng a job contact, researchers focus on racal dfferences n the composton of socal networks and the neghborhood context of job search (Green et al., 1999). An mportant fndng of ths lne of research s that for Black workers the effect of contacts on wages, employment, and occupatonal status s contngent on the race and resdental locaton of the contact person, the number of employed contacts the worker has, and whether the worker s lvng n a hgh-poverty neghborhood. Although the results are nconsstent across all of the papers, a number of these authors have found that ether Blacks have lower returns from usng personal contacts (Korenman and Turner, 1996) or that certan types of contacts lower occupatonal status (Falcon and Melendez, 2001), employment probabltes (Holzer, 1987; Olver and Lchter, 1996), or the wages of Black workers (Green et al., 1995, 1999) and less-educated urban workers (Ellot, 1999). As a result, t has been argued that Black workers face severe barrers when usng nformal methods of job search (Holzer, 1987, p. 452) and that ther relance on famly and frends for nformaton restrcts ther job opportuntes (Falcon and Melendez, 2001, p. 344; Ln, 1999, p. 483). In ths paper I mantan that, whle the focus on the socal context of job search depcted n these papers s mportant, there are theoretcal and methodologcal reasons why t may be premature to conclude that usng nformal methods to fnd work restrcts the opportuntes of Black workers. Frst,

T. Mouw / Socal Scence Research31 (2002) 511 538 513 socal segregaton notwthstandng, there are good reasons to thnk that nformal methods of job search may be more mportant for Blacks than Whtes. Job contacts may provde nsde nformaton that can help potental applcants locate employers that do not dscrmnate n the hrng process, thereby reducng the cost and dffculty of job search and ncreasng employment and/or wages. In addton, referrals from a current employee who vouches for the ablty and character of an applcant can ncrease hrng probabltes n cases where employers engage n statstcal dscrmnaton based on racal stereotypes. In other words, although Black workers who lve n socally solated neghborhoods may not be as well connected to job networks as Whte workers, we should be cautous about concludng that relyng on frends and neghbors to fnd work actually restrcts ther job opportuntes. Second, I argue that the data used n cross-sectonal data sets are msleadng because they assume that the use of contacts s an exogenous varable. In contrast, f workers choose whch job search strateges to use, then we cannot rely on cross-sectonal data to tell us whether nformal search methods such as relyng on frends for nformaton are better or worse than more formal methods. The economc search model of unemployment suggests why: based on a search theory model wth multple methods of job search (Montgomery, 1992), the actual method that a worker uses to fnd work s an endogenous varable. Smply put, f a worker has good contacts, then he or she wll accept a job only through formal job search methods f t s at least as good as he could have done relyng on hs connectons. As a result the data that the researcher actually observes s dstorted: accepted job offers whether they are from contacts or other methods reflect the overall opportuntes avalable to the ndvdual, not the effect of the partcular method of job search. Consequently, a negatve relatonshp between contacts and wages n cross-sectonal data may smply reflect a lower level of opportunty n general rather than a negatve effect of usng job contacts. In ths paper, I do two thngs. Frst, I use cross-sectonal data wth socal network nformaton from the 1994 Mult-Cty Study of Urban Inequalty (MCSUI) to ndcate the level of socal segregaton n large urban areas and to corroborate the fndng n prevous studes of a negatve assocaton between contacts and wages for Black workers. Next, I use longtudnal data from the Natonal Longtudnal Study of Youth (NLSY) to argue that these cross-sectonal results are msleadng. When I look at Black workers who changed jobs between 1994 and 1996, I fnd no evdence that Black workers dd worse when they used contacts compared to when they dd not use contacts. Ths ndcates that t s not necessarly the use of contacts that s lowerng wages. I argue that these results can be nterpreted n lght of a search model wth multple methods, and I dscuss the mplcatons for future research on how the nformal organzaton of the labor market affects equal opportunty between Blacks and Whtes.

514 T. Mouw / Socal Scence Research31 (2002) 511 538 2. Socal solaton and job contacts The prevalent use of contacts to fnd jobs ndcates one way that the socal solaton of urban Blacks may affect ther labor market outcomes: Black workers may not be as well connected as Whte workers. In The Truly Dsadvantaged, Wlson (1987) argues that lvng n a socally solated nner-cty neghborhood has negatve consequences because of the lack of both postve role models and job contacts wth workers employed n wellpayng jobs. Whle the lack of role models suggests a socal psychologcal dmenson to urban poverty, the lack of contacts ponts to the role of socal structure n determnng labor market outcomes. To what degree are urban Blacks socally solated? Spatal patterns of segregaton by race and class are well documented. Hgh levels of resdental segregaton between Blacks and Whtes characterze large urban areas n Amerca (Massey and Denton, 1993), and there s evdence that largely Black central cty areas are experencng an ncreasng concentraton of poverty (Jargowsky, 1997). Accordng to Jargowsky (1997), not only are unemployment rates sgnfcantly hgher n poor neghborhoods, but the number of people lvng n census tracts wth poverty rates greater than 40% doubled between 1979 and 1989. Consequently, f job networks are at least partly based on neghborhood contacts, then hgh levels of resdental segregaton and concentrated nner-cty poverty suggest that the members of BlacksÕ socal networks wll be less lkely to be employed n steady jobs (actual evdence on ths hypothess s presented below). If Blacks are excluded from job networks because they lve n poor nner-cty neghborhoods, then a persstent Black/Whte wage dfferental may be partly explaned by structural forces rather than any ntrnsc dfferences between Black and Whte workers. Whle there are good reasons to beleve that urban Black workers are not as well connected to job networks as Whte workers, there s also ample evdence that both Blacks and Whtes make frequent use of job contacts to fnd jobs. A large percentage of both Black and Whte job-searchers use nformal methods of fndng work. Usng Panel Study of Income Dynamcs (PSID) data, for example, Corcoran, Datcher, and Duncan (1980) report that 56% of Whte men and 67% of Black men heard about ther current job from frends or relatves, and ths fndng s supported by other studes that fnd smlar levels of nformal job search among Whtes and Blacks (Falcon and Melendez, 2001; Green et al., 1995, 1999). Nonetheless, despte the prevalent use of contacts and good theoretcal and ntutve reasons to thnk that connectons would be benefcal n the labor market (Granovetter, 1995), there s lttle conclusve emprcal evdence that usng contacts actually affects wages (e.g., Brdges and Vllemez, 1986; Corcoran et al., 1980; for a revew see Granovetter, 1995). Therefore, whle proponents of the socal solaton perspectve argue that nner-cty Blacks lack job contacts,

T. Mouw / Socal Scence Research31 (2002) 511 538 515 the lack of evdence on the effect of contacts seems to cast doubt on ths as an explanaton for persstent urban poverty n Amerca s nner ctes. However, one of the problems wth research that looks at the overall effect of contacts on wages s that t msses the socal context of job search. Because of dfferences n the composton of socal networks, the effect of contacts may depend on the job seeker s locaton wthn the socal structure. Granovetter argues that makng blanket assumptons about the payoff to contacts s too ndvdualstc and that researchers should focus on how group and ndvdual dfferences n networks mght affect the outcome of usng contacts (1995, p. 150). To observe racal dfferences n the effect of job contacts t may be necessary to nvestgate the composton and structure of job networks n more detal. For example, there are hgh levels of segregaton among the frendshp networks (Olver and Lchter, 1996, and Tables 2 and 3) and job contacts (Falcon and Melendez, 2001; Green et al., 1999; Olver and Lchter, 1996) of Whte and Black workers. In addton, there s evdence of dfferences n the composton of networks, the use of contacts, and the type of contacts used among Blacks and Whtes as a whole (Falcon and Melendez, 2001; Green et al., 1999) and among urban job-seekers lvng n hgh- and low-poverty neghborhoods (Ellot, 1999; Olver and Lchter, 1996). These dfferences suggest rather than havng one effect of contacts for all groups, the effect of contacts vares accordng to the worker s socal context. By studyng job search as an embedded socal process, the recent lterature on racal dfferences n job contacts promses to nform our understandng of the role that socal networks play n the labor market as a whole. Below, I dscuss the results of ths lterature n detal. For clarty, I dvde the papers nto two groups. One group of papers looks at racal dfferences n the effect of nformal and formal job search as a whole (Falcon and Melendez, 2001; Holzer, 1987; Korenman and Turner, 1996), whle the other group analyzes dfferences n the effect of certan types of contacts, the composton of networks, and the effect of contacts n hgh-poverty neghborhoods (Ellot, 1999; Green et al., 1995, 1999; Olver and Lchter, 1996). Usng cross-sectonal data on unemployed workers from the 1982 NLSY, Holzer (1987) fnds that although Whtes and Blacks are equally lkely to use nformal methods of job search, the monthly probablty of gettng hred usng contacts wth frends or relatves seems to be about 50% lower for blacks than Whtes. He concludes that job search strateges that stress formal and nsttutonal mechansms of job placement may be more effectve for Black workers. Korenman and Turner (1996) study racal dfferences n the effect of contacts on wages usng data from a Natonal Bureau of Economc Research (NBER) survey of young workers from three hgh-poverty neghborhoods n Boston (Roxbury, South Boston, and Dorchester). They fnd that the coeffcent on contacts n regressons on wages s sgnfcantly hgher for Whtes than Blacks. Usng contacts ncreased the wages for Whtes by about 20% and had no statstcally sgnfcant effect for Black workers. However,

516 T. Mouw / Socal Scence Research31 (2002) 511 538 when they turn to natonally representatve data from the 1982 wave of the NLSY, they fnd no evdence of racal dfferences n the returns to contacts. They nterpret these results by argung that n dsadvantaged neghborhoods (as opposed to the economy as a whole), hgh-payng jobs are scarce and are lkely to be ratoned to well-connected Whte workers. Next, Falcon and Melendez (2001) study the effect of job contacts on occupatonal status, wages, and workplace segregaton for Black, Whte, Asan, and Latno workers n the 1994 MCSUI. They fnd that usng frends or relatves to fnd work has no effect on the wages of Black workers. It does, however, seem to reduce the occupatonal prestge of Black, Latno, and Asan workers (usng contacts s assocated wth a decrease n the SEI ndex of 1.77 ponts for Blacks) and ncrease the chance of workng n a workplace where the majorty of the workers are mnortes. On the bass of these results, they argue that ther results show that fndng a job through socal networks has negatve mplcatons for Black and Latno workers n general (Falcon and Melendez, 2001, p. 344). In addton to studes whch look at the blanket effect of usng contacts on employment rates and wages, t has been argued that the type of contacts that nner-cty workers use results n lower payng employment. Accordng to Granovetter s strength of weak-tes hypothess, for example, the tendency of nner-cty Blacks to rely on strong tes wth frends, relatves, or neghbors rather than weak tes wth acquantances results n redundant job nformaton and poorer employment prospects (Granovetter, 1974). Usng data from the Atlanta survey of the 1994 MCSUI data, Green et al. (1995) fnd that usng contacts wth workers nsde the frm, relatves, or neghbors reduces the wages of Black job seekers. Accordng to ther results, Black respondents who found ther jobs through neghborhood contacts earned $3200 less than those who used no contacts, and those who used contacts wth relatves or someone who worked at the hrng frm earned $2700 and $1700 less, respectvely. In addton, usng socal network data, they fnd that the number of employed tes a worker has s sgnfcantly assocated wth hgher wages mplyng negatve consequences of socal solaton. They conclude that these results support the vew that Black/Whte dfferences n socal resources explan much of the racal gap n poverty and earnngs. In a follow-up paper usng MCSUI data from Atlanta, Boston, and Los Angeles, Green et al. (1999) make a more nuanced argument about how the type of job contact s lkely to dsadvantage workers n socally solated neghborhoods. They argue that whle usng contacts n general does not affect wages, usng what they call multplex contacts strong-te, wthnfrm contacts wth neghbors (whch represent 27% of the jobs found by Black job seekers) has a substantal negatve effect. In ther sample, the magntude of ths negatve effect s equvalent to the effect of four years of educaton, suggestng sgnfcant dsadvantages for socally solated

T. Mouw / Socal Scence Research31 (2002) 511 538 517 nner-cty mnortes. Smlarly, Olver and Lchter (1996) use data from Black respondents n Los Angeles MCSUI data. When they dvde ther data nto three groups based upon low, medum, and hgh levels of tract poverty they fnd that respondents n low-poverty neghborhoods have more socal tes, and a hgher percentage of employed tes, than respondents n hghpoverty neghborhoods. Ther statstcal models show that certan types of network tes (the number of tes wth college graduates, employed workers, and non-blacks) sgnfcantly ncrease the probablty of employment. In contrast to employment probabltes, however, the effect of networks and contacts on wages s ambguous. Usng a neghborhood contact to fnd work s assocated wth substantally lower earnngs for Black males (but not for Black women), and havng employed tes and usng non-black job contacts ncrease the wages for both men and women (but the coeffcents are not statstcally sgnfcant at the.05 level). They conclude that networks affect the employment of nner-cty Blacks, but do not seem to have much effect on wages. The effect of contacts may depend on whether the respondent lves n hgh- or low-poverty neghborhoods. Ellot (1999) uses data on employed Whte, Black, and Latno workers wth a hgh school educaton or less. In contrast to the expectatons of the socal solaton hypothess, he fnds that respondents n hgh-poverty neghborhoods are actually more lkely than respondents n low-poverty neghborhoods to use contacts to fnd work. Therefore, he argues, t s not a queston of whether contacts exst n hgh-poverty neghborhoods that s mportant, but whom these contacts are wth and how they nfluence labor market outcomes. In a pooled regresson of respondents n hgh- and low-poverty neghborhoods, he fnds a negatve relatonshp between the use of contacts and wages. However, n separate analyses of respondents n low- and hgh-poverty neghborhoods, these results hold n low-poverty but not n hgh-poverty neghborhoods. In all the models, however, there s a consstent negatve effect for workng wth non-whte co-workers. Ellot hypotheszes that one consequence of socal segregaton among urban mnortes s that the prevalent use of contacts to fnd work leads them to predomnately non-whte frms, whch tend to pay lower wages. He argues that although workers n hgh-poverty neghborhoods are not socally solated, the use of personal contacts serves as a strategy of last resort, rather than as a means of leveragng oneself nto better jobs (1999, p. 213). In sum, the recent research on racal dfferences n the effects of job contacts s mportant because t attempts to depct the way n whch job search s embedded n racally segregated socal networks. One consstent fndng of ths lterature s that, despte the predctons of the socal solaton hypothess, job contacts are actually a common method of fndng work among workers who lve n hgh-poverty neghborhoods (Ellot, 1999). In addton, although there s consderable varaton n the fndngs across the dfferent

518 T. Mouw / Socal Scence Research31 (2002) 511 538 papers, all of the authors presented here fnd somethng about the use of socal networks to fnd work that seems to negatvely affect labor market outcomes. As a result, t s possble to conclude that when the socal context of job search s consdered n detal, certan types of contacts reduce the employment rates (Holzer, 1987; Olver and Lchter, 1996), wages (Ellot, 1999; Green et al., 1995, 1999), or occupatonal prestge (Falcon and Melendez, 2001) of nner-cty and/or Black workers. Ths concluson s tempered, of course, by the fact that Falcon and Melendez (2001) and Olver and Lchter (1996) usng slghtly dfferent varables and data do fnd no effect of contacts on wages, and Ellot (1999) fnds no effect for respondents n hgh-poverty neghborhoods. However, taken as a whole, the evdence can be nterpreted as suggestng that although the urban poor have job contacts, ther job networks are not well connected and are less effectve at provdng entree nto well-payng, stable employment. Green et al. conclude that more than those who are not n poverty, poor people rely on famly and frends for nformaton and support, and ths restrcts ther job opportuntes (Green et al., 1995, p. 178). Falcon and Melendez argue that the poor n nner-cty areas are ncreasngly solated from nteracton wth other classes and that, as a result, the socal tes of these ndvduals seldom reach beyond ther own socal poston (2001, p. 368), and Holzer argues that Blacks face sgnfcant barrers when usng nformal rather than formal search methods (1987, p. 446). Nonetheless, despte the fact that ths research seems to confrm our ntuton about the effect of socal solaton on labor market outcomes, I argue n the next secton that there are several reasons why we should nterpret these results cautously. 2.1. An alternatve nterpretaton As ndcated above, Black workers may not be as well connected to job networks as Whte workers. However, rather than restrctng ther employment prospects, the prevalent use of nformal methods of job search by urban Blacks may, on the contrary, be an ndcaton of the lack of effectveness of other methods of job search. For example, Ellot (1999, p. 213) argues that the ncreased use of contacts to fnd work among workers n hgh-poverty neghborhoods results from ther excluson from formal job openngs. Lkewse, Granovetter notes that n partcular groups, fndng jobs through contacts may be one s best opton, yet the jobs found may stll be of poor qualty by general standards f ths s all the group can provde (1995, pp. 150 151). In ths paper, I renterpret the fndngs on the effect of job contacts on the wages of Black workers n lght of two consderatons. Frst, gven the exstence of racal dscrmnaton and stereotypng n the labor market, we mght expect job contacts to reduce the search costs and ncrease the hrng rates of Black workers. As a result, those Black workers who are well

T. Mouw / Socal Scence Research31 (2002) 511 538 519 connected n the labor market should do sgnfcantly better than Black workers who are not. Therefore, the exstng cross-sectonal results are puzzlng. Second, f workers choose the method they use to fnd work based on ther own economc self-nterest, then the method actually used to fnd work s endogenous to perceved dfferences n outcomes among the methods. Consequently, t s reasonable to beleve that f nformal methods really do lower the wages of nner-cty Black workers, then the workers themselves would tend to swtch to more formal methods of job search. As shown below, ths has sgnfcant emprcal mplcatons. In order elaborate on both of these arguments, we frst turn to a dscusson of why contacts are so prevalent n the labor market. Most labor markets are not formally organzed n the sense that there s lttle relance on centralzed market nsttutons that attempt to mprove the effcency of the match between job-seekers and prospectve employers. On the contrary, much of the nformaton about job openngs s dstrbuted through nformal frendshp networks. Accordng to natonal surveys, about 40 50% of all jobs are found wth help from a frend or relatve (Granovetter, 1974); evdently a sgnfcant amount of job nformaton passes through nformal socal networks. The nformal organzaton of the labor market suggests that socal structure or who knows whom plays an mportant role n the labor market. One explanaton for the nformal organzaton of the labor market s that there s a problem of mperfect nformaton. Rees (1966) argues that whle t mght seem appealng to try to centralze the matchng of buyers and sellers of labor through a formal market mechansm n order to elmnate unemployment a sort of Chcago Board of Trade for labor rather than agrcultural products the central problem of the labor market s one of nformaton. Employers have mperfect nformaton about the sklls and abltes of potental applcants, and unemployed workers have poor nformaton about the characterstcs and workng condtons of potental jobs. Rees suggests that the problem of nformaton means that the labor market s smlar to the market for used cars. Because dfferences n prce may (or may not) reflect dfferences n qualty, to get the best deal t makes sense to conduct an ntensve and careful search of a few cars rather than an extensve search of many. Lkewse, both employers and workers do better by conductng an ntensve search of a few possbltes rather than a superfcal search of many job openngs or applcants. In the presence of racal dscrmnaton, the problem of mperfect nformaton has mportant mplcatons for racal dfferences n the mportance of job contacts. Economc models of dscrmnaton n the labor market argue that there are two fundamental types: outrght dscrmnaton a taste for one racal group over another and statstcal dscrmnaton based on real or magned stereotypes about group dfferences (Can, 1986). Both types have consequences for the use of contacts. Frst, the presence of a taste for racal dscrmnaton among employers, evdent ether n an

520 T. Mouw / Socal Scence Research31 (2002) 511 538 outrght reluctance to hre Black workers or n dscrmnatory treatment of Black workers they do hre, ponts to one reason. Because explct dscrmnaton n hrng practces s llegal (and wll not be explctly advertsed), Black job seekers who rely on formal methods of job search, such as respondng to newspaper advertsements or help-wanted sgns wll not have good nformaton about whch employers are dscrmnatory. Ths effectvely rases the costs of job search for Black workers. Gven a certan percentage of dscrmnatory employers, Black job-seekers wll have to apply to more jobs than Whtes to get the same number of job offers. As the percentage of employers wth dscrmnatory hrng practces ncreases, the dffculty of obtanng a job offer ncreases. Ths ncreases the costs n terms of tme and money of conductng a job search. In a theoretcal model of racal dfferences n job search, Black (1995) shows that exstence of dscrmnatory employers combned wth poor nformaton about ther dentty rases job search costs for Blacks and results n lower wages for Blacks vs-a-vs Whte workers. In contrast, the sharng of job nformaton among Black workers may substantally reduce search costs. Informaton based on the past experences of other workers may help avod employers wth a reputaton for not hrng Black workers. In addton, contacts wth Black workers already employed at a frm s prma face evdence that the frm hres mnortes and provdes evdence on the frmõs treatment of the those workers that t does hre thereby reducng turnover after the job offer s accepted. As a result, n the presence of employer dscrmnaton those Black workers who are well connected may do better than those who are not because nformaton from other employed workers reduces search costs. In addton, job networks wll be mportant n the presence of statstcal dscrmnaton. Whle t has been argued that an employerõs preference for Whte workers, regardless of ablty, s economcally neffcent and should dsappear n compettve markets (Becker, 1957), statstcal dscrmnaton may be ratonal from the employerõs pont of vew (Arrow, 1972; Phelps, 1972; for a dscusson of the effcency of statstcal dscrmnaton see Schwab, 1986). If nformaton about workersõ abltes s costly to obtan, then expectatons of racal dfferences n ablty (real or magned) may result n employers usng race as a cheap screenng devce (Phelps, 1972). In these stuatons, referrals from a current employee may substantally mprove hrng rates by provdng addtonal nformaton about the applcant as well as a degree of mutual accountablty between the referrng worker and the applcant to perform well. In labor markets wthout clear objectve measures of dfferentatng among job applcants and provdng nformaton on desred characterstcs such as relablty and trust-worthness, employers may refer to subjectvely constructed racal stereotypes n makng hrng decsons. For example, n a qualtatve study of employer hrng practces n Chcago, Krschenman and Neckerman (1991) argue that employee referrals are partcularly mportant n low sklled blue-collar and servce sector jobs

T. Mouw / Socal Scence Research31 (2002) 511 538 521 because most employers rely to some extent on racal stereotypes about productvty. In the words of one employer that they ntervewed: All of a sudden, they take a look at a guy, and unless heõs got an n, the reason why I hred ths black kd the last tme s Õcause my neghbor sad to me, yeah, I used hm for a few, heõs good, and I sad, you know what, IÕm gong to take a chance... (p. 228). The fact that Black workers may not be as well connected as Whtes to job networks s certanly one plausble explanaton for the Black/Whte wage gap. Nonetheless, ths does not mean that contacts are less mportant for Black workers or that usng contacts restrcts ther job opportuntes. On the contrary, n stuatons of ether drect or statstcal dscrmnaton n the hrng process there are good reasons to beleve Black workers who are well connected wll have sgnfcant advantages over those who are not well connected. There s a fnal reason to be cautous about acceptng the exstng emprcal results about racal dfferences n the effect of contacts on wage. The observed data may be dstorted because workers choose whch job search method to actually use. One way to explan the mplcatons of the choce of search method on the observed data s to use the economc model of job search. Whle economc search models present a mathematcal treatment of the search process, t s not necessary to accept the mathematcal formalzaton to apprecate the logc behnd t. There are a few basc prncples behnd a search theory model (see Devne and Kefer, 1991, for a full treatment). (1) Indvduals obtan job offers where the wage of the offer s drawn from a statstcal dstrbuton. (2) Job offers arrve sequentally, and the worker must decde whether to accept the job before contnung to search for more offers. (3) Indvduals have reservaton wages, whch ndcate the mnmally acceptable wage offer. Reservaton wages are chosen to maxmze earnngs and they factor n job search costs, the dstrbuton of offers, the probablty of gettng an offer, and the foregone wages due to unemployment. Offers that are equal to or hgher than the reservaton wage are accepted. Offers that are less than the reservaton wage are rejected. In other words, the frst offer wth a reasonable wage s accepted. 1 (4) Everythng else beng equal, ncreasng the average of the wage offer dstrbuton rases the ndvdual s reservaton wage; the ndvdual rases hs/her expectatons of what a reasonable job s. Recently, t has been argued that the search theory model wth multple methods of job search can help explan the null results n the emprcal lterature on the effect of contacts on wages (Montgomery, 1992). For 1 Emprcally, t turns out that very few job offers ate actually rejected (see Devne and Kefer, 1991). Ths could be because workers use pror nformaton to search for work at hgh-wage frms frst.

522 T. Mouw / Socal Scence Research31 (2002) 511 538 example, f workers use two methods of job search, nformal contacts and formal applcatons, then a hgh average wage offer for nformal contacts may be reflected n hgher wages for all jobs that are accepted, regardless of whether they were found through contacts or formal means. Indvduals wth good connectons may smply rase ther reservaton wage so that they have hgh wage expectatons for an acceptable job. For these ndvduals, job offers from formal methods although not as good, on average, as job offers from contacts wll be accepted only f they pay more than the reservaton wage. As a result, the wages of accepted jobs wll not reflect the true dfference between wage offers among the two methods. They may be more lkely to accept jobs usng nformal methods because these jobs are more lkely than formal methods to generate offers above the reservaton wage but there may be no wage dfference between accepted nformal and formal job offers. In general, f contacts do result n better job offers, then acceptance of only those offers that exceed the reservaton wage weakens the emprcal relatonshp between contacts and hgh wages although the precse effect depends on the actual dstrbuton of wage offers and the probablty of recevng offers (Montgomery, 1992). If we beleve ths ratonal model of job search behavor, then t would seem ncorrect to argue that the exstng emprcal evdence shows a causal lnk between usng contacts and lower wages because the job search method used s an endogenous varable. Ths rases the queston of whether Black workers are dong as well usng contacts as they would usng more formal methods. As argued below, one way to test ths would be to follow the same workers over tme to see whether there was any systematc dfference between when they dd and dd not use contacts. 3. Methods Ths paper compares the results of cross-sectonal and longtudnal models of the effect of contacts on the wages of Black workers. As dscussed above, prevous research on contacts and Black/Whte wage dfferences used cross-sectonal data to estmate the relatonshp between the use of contacts and wages. The coeffcent on contacts s then nterpreted as an ndcaton of whether the use of contacts by mnortes restrcts ther job prospects. The mplct assumpton of ths approach s that the job search method (.e., contacts, newspaper, etc.) s an exogenous varable. In contrast, a job search model wth multple methods of job search argues that the method used s endogenous to the qualty of the workers nformal and formal offer dstrbutons. As I argued above, t s not necessary to accept the precse mathematcal formulaton of such a search model to accept ts basc premse. If workers are usng both nformal and formal methods to search for work, then (1) they wll tend to fnd jobs wth the methods that provde the most

T. Mouw / Socal Scence Research31 (2002) 511 538 523 promsng job leads and (2) any job offer that s accepted wll be better than the reservaton wage whether t s through formal or nformal methods. Therefore, we mght not fnd a bg dfference between accepted job offers from contacts and other methods. The frst part of the statstcal analyss n ths paper uses cross-sectonal data. The model that s estmated s gven by Eq. (1) as follows: w t ¼ bx t þ ac t þ O formal þ O contacts þ e t ; ð1þ where w s log wages, X s a vector of varables measurng the observed characterstcs of the worker, C s a varable ndcatng whether the worker used a contact (or a partcular type of contact) to fnd her most recent job, and e s an error term. The subscrpt t ndcates varables that vary over tme for worker. Fnally, O formal and O contacts are varables representng the qualty of job offers that the worker would receve by usng formal methods of job search or by usng contacts. Because the researcher observes only accepted job offers, O formal and O contacts are unobserved varables. If the type of method used to fnd work s assumed to be an exogenous varable, then the use of contacts, C, s uncorrelated wth the qualty of the worker s offers through formal and nformal methods, O formal and O contacts. If ths s true, then n a regresson on w for Black workers, a negatve value for the coeffcent on C, a, s evdence that usng contacts decreases wages. The frst part of the analyss uses cross-sectonal data from the 1994 MCSUI and the 1994 NLSY to attempt to corroborate the fndngs of prevous research. However, s the use of contacts really an exogenous varable? It s possble that Afrcan Amercan workers who use contacts do so because they are more effectve than formal search methods such as replyng to newspaper advertsements? We can test ths by followng workers over tme. Dd these workers do better when they found jobs through more formal methods of job search? The second part of the analyss for ths artcle uses data from the 1994 and 1996 waves of the NLSY to estmate a fxed-effects model of contacts on wages. A fxed effects model estmates changes n ndvdual wages over tme as a functon of changes n the ndependent varables. An ndvdual-specfc mean s subtracted from each varable; as a result, the constant effects of unchangng varables that do not vary over tme drop out of the model. In other words, the model estmates the effect of contacts by comparng the wages an ndvdual obtaned wth contacts versus the wages the same ndvdual receved when he or she used no contacts to fnd work. The model s as follows: w t w ¼ bðx t X ÞþaðC t C Þþðe t e Þ: ð2þ The unobserved, person-specfc varables measurng qualty of the formal and nformal offer dstrbutons, O formal and O contacts, drop out of the model. A comparson of the results obtaned by estmatng Eqs. (1) and (2) wth the NLSY data can be used to make nferences about the exogenety of the

524 T. Mouw / Socal Scence Research31 (2002) 511 538 contact varable wth respect to O formal uncorrelated wth O formal and O contacts and O contacts. More precsely, f C s, whch s the mplct assumpton n the prevous lterature on Black/Whte dfference n job contacts, a should be roughly the same n both models. The alternatve hypothess s that the use of contacts to fnd work, C, s endogenous to O formal and O contacts. Accordng to the job search model outlned above, a ratonal worker wll accept job offers only f they are better than the reservaton wage, whch reflects the overall opportuntes avalable to the worker. In ths sense, a negatve coeffcent on C n the cross-secton does not necessarly mean that contacts actually have a negatve effect on wages. Indeed, the concept of a reservaton wage suggests that workers would not accept job offers from contacts f they decreased ther wages relatve to how they could do usng other methods of job search. Ths hypothess predcts that because C s correlated wth O formal be the same n cross-sectonal and fxed effects models. and O contacts ; a wll not 4. Hypotheses We can dstngush three hypotheses. Each hypothess s depcted n Table 1. 1. Negatve effect. Usng cross-sectonal data, prevous research has found a negatve relatonshp between some types of contacts (neghbors and co-workers) and the wages of Black workers or workers lvng nner-cty neghborhoods n partcular. Ths result s ntutvely appealng because, as argued above, Black workers are lkely to be less well connected n the labor market than Whte workers are. The mplct assumpton of ths research s that the choce of method s an exogenous varable. Ths hypothess predcts that the coeffcent on contacts n both the cross-sectonal and longtudnal results should be negatve. 2. Postve effect. Although Black workers on average are not as well connected as Whte workers to job networks, connectons may nonetheless be partcularly mportant for Black workers. Because of dscrmnaton, contacts may provde useful nformaton to help locate nondscrmnatory Table 1 Hypotheses about the effect of contacts on the wages of Black workers Hypothess In regressons on wages for Black workers Is the use of contacts Predcted cross-sectonal an exogenous varable? coeffcent on contacts 1. Negatve effect Yes Negatve Negatve 2. Postve effect Yes Postve Postve 3. Search model No; cross-sectonal data are dstorted? Zero Predcted fxed-effects coeffcent on contacts

T. Mouw / Socal Scence Research31 (2002) 511 538 525 employers and ncrease hrng probabltes. As a result, the use of contacts s predcted to have a postve effect on the wages of Black workers. 3. Searchmodel. Based on an economc model of job search behavor, the worker s reservaton wage takes the expected qualty of offers from dfferent search methods nto account. If a worker has good connectons n the labor market, then hs reservaton wage wll rse, reflectng ncreased expectatons. Consequently, the only job offers that are actually accepted whether they are from contacts or from formal applcaton wll be at least as good as the reservaton wage. Ths hypothess predcts that whle there may be a negatve relatonshp between wages and contacts for Black workers n the cross-secton, ths result wll dsappear f we follow the same workers over tme. 5. Data and descrptve results Ths paper uses data from the 1994 MCSUI and the 1994 and 1996 waves of the NLSY. The MCSUI data s a representatve sample of households n four large urban areas, Detrot, Boston, Atlanta, and Los Angeles. Data on the socal networks of workers and detaled nformaton on job contacts were collected n Boston, Atlanta, and Los Angeles. Ths paper uses the MCSUI data from these three ctes for all Black or Whte respondents who searched for work n the past fve years, resultng n a sample of 865 Black and 752 Whte workers. In addton, the 1994 1996 waves of the NLSY represent a unque source of longtudnal nformaton on job search behavor because the same queston about job search methods was asked of all the jobs the respondent held between 1993 and 1996. The NLSY sample uses all Black or Whte respondents who changed jobs between 1994 and 1996, resultng n a sample of 617 Black and 1036 Whte workers. To begn wth, Tables 2 6 provde descrptve evdence on racal dfferences n socal networks and job contacts between Blacks and Whtes from the MCSUI data. Table 2 shows the racal segregaton of socal networks for Black and Whte respondents. Each respondent was asked to provde demographc nformaton on three dscusson partners. Whle ths s not complete Table 2 Racal segregaton of socal networks Respondent s Race of frend n network (%) (N) race Whte Black Hspanc Asan Other Total Whte 83.0 5.5 6.1 2.8 2.7 100 (752) Black 7.8 85.5 3.0 1.2 2.5 100 (865) Total 38.0 29.8 19.7 10.9 2.3 100 (1617) Source. MCSUI data from Los Angeles, Atlanta, and Boston.

526 T. Mouw / Socal Scence Research31 (2002) 511 538 Table 3 Method of fndng most recent job Race Contacts: method used (N) Newspaper Relatve Frend Acquantance Other Total Whte 20.0 10.4 25.7 12.2 31.8 100 (752) Black 21.6 12.8 32.7 7.3 25.6 100 (865) Total 20.8 11.7 29.4 9.6 28.5 100 (1617) Source. MCSUI data from Los Angeles, Atlanta, and Boston. Table 4 Characterstcs of the contact person, by respondent s race (only for respondents who were helped by a contact person) Respondent s Race of person who helped fnd most recent job (N) race Whte Black Hspanc Asan Total Whte 88.0 6.4 3.4 2.2 100 (356) Black 10.1 86.1 2.3 1.4 100 (450) Source. MCSUI data from Los Angeles, Atlanta, and Boston. Table 5 The man way contact person helped the respondent get most recent job (%) (only for respondents who were helped by a contact person) Race Told me about job Hred me Talked to employer about me Gave me a reference Other Total Neghbor Worked at frm Whte 46.0 14.6 27.1 5.7 6.6 100 14.6 31.4 (356) Black 61.2 9.1 22.5 5.2 2.0 100 20.4 34.6 (450) Total 54.5 11.5 24.5 5.4 4.1 100 17.7 33.1 (806) Source. MCSUI data from Los Angeles, Atlanta, and Boston. (N) network nformaton, t does provde evdence of the demographc composton of workers socal tes. In the MCSUI data 83% of Whtes frends are Whte, and 86% of Blacks frends are Black. Ths s not surprsng because we would expect that racal segregaton n frendshp networks would parallel resdental segregaton. Nonetheless, ths hgh level of socal segregaton suggests that nformally transmtted job nformaton s lkely to pass through racally homogenous socal networks. Table 3 shows the how the respondent found hs or her most recent job. For both Whtes and Blacks, a majorty used a personal contact (e.g., a relatve, frend, or acquantance) to fnd work. Whle contacts wth a relatve or an acquantance to fnd work each represent around 10% of the sample, nearly 30% of respondents used a frend to fnd ther most recent job. As a result, the relatve frequency of usng strong tes wth relatves or weak

T. Mouw / Socal Scence Research31 (2002) 511 538 527 Table 6 Summary statstcs for MCSUI data Whtes Blacks Obs Mean SD Obs Mean SD Log of hourly wage 752 2.47 0.50 865 2.23 0.48 Age 752 36.01 11.14 865 33.07 9.36 Male 752.49 865.52 Educaton (years) 752 14.31 2.11 865 13.73 1.92 Tenure at current turn 752 3.59 4.86 865 2.79 3.48 Network data (excludng coworkers) Mssng network data 752 0.21 865 0.22 Proporton wth steady jobs 593 0.77 0.32 684 0.75 0.33 Avg. educaton 593 13.98 1.78 684 13.62 2.02 Proporton on welfare 593 0.03 0.13 684 0.08 0.22 Total network members 593 2.67 0.60 684 2.43 0.74 tes wth acquantances depends on how frends are classfed. In the statstcal analyss for the MCSUI data, I estmate separate coeffcents for each category of personal contacts n order to avod classfyng frends as ether strong or weak tes. Next, for those workers who used contacts to fnd work, Table 4 shows the race of the person who helped the respondent fnd hs or her job. Ths table demonstrates that there s lttle nter-racal sharng of job nformaton. The race of the contact person s almost always the same as that of the respondent Smlarly, Table 5 shows racal dfferences n how the contact helped the respondent get the job. Here we are nterested n dfferences n the lkelhood that the contact hred the respondent or talked drectly to the employer about the respondent. These are lkely to be nstances where the contact was nstrumental n obtanng the job for the respondent. Whtes are more lkely to be hred by the contact or have ther contact talk to the employer on ther behalf. Table 5 also shows racal dfferences n whether the contact lved n the same neghborhood as the respondent and whether he or she worked at the frm that hred the respondent. Black workers are more lkely to use neghborhood contacts. Ths seems to ndcate that Blacks depend more on strong tes based upon proxmty that may provde less access to wder socal crcles and nonredundant job nformaton. On the other hand, slghtly more Blacks used nsde contacts who worked at the hrng frm. Fnally, Table 6 presents summary statstcs on racal dfferences n several composte network varables. In constructng these varables, I excluded network members who worked at the same job as the respondent, as they are most lkely to represent cases where the drecton of causalty between socal networks and job outcomes s reversed (about 7% of network members were co-workers). In addton to average educaton and the number

528 T. Mouw / Socal Scence Research31 (2002) 511 538 of network members, I use the proporton of network members employed n steady jobs and the proporton on welfare. 2 Table 6 shows that the members of Blacks socal networks are not as hghly educated as Whtes network members, and they are more lkely to be on welfare. However, there s lttle racal dfference n the proporton of network members who have steady jobs. Ths result seems surprsng because we know that the Black unemployment rate s substantally hgher than the Whte unemployment rate. Because of hgh levels of racal socal segregaton, the average characterstcs of Whtes and Blacks socal networks are lkely to be smlar to the populaton averages for the local Whte and Black populatons respectvely (but not necessarly because some workers could have more network tes than others). In addton, because the sample contans data on the most recent job for all respondents who searched for work n the past fve years, t ncludes most of those workers who are currently unemployed. Therefore, t s unlkely that the neglgble dfference n employed network members s due to the composton of the sample. 3 However, a better verson of ths queston would dstngush among several categores of labor force status rather than ask f the network member s employed n a steady job. Ths would allow us to dfferentate between retred and unemployed network members. In addton, f these network questons had been desgned to study labor market outcomes, then t would have been mportant to know the occupaton of network members. Whle educaton may be strongly correlated wth earnngs, havng frends wth hgher human captal levels than oneself does not readly translate nto a net beneft n the labor market On the contrary, a jantor wth three frends who are jantors, for example, may obtan better nformaton about jantoral job openngs than a jantor wth three frends who are doctors and lawyers. The actual transmsson of job nformaton through socal contacts s lkely to be complex and at present s poorly understood. Therefore, to assocate the average value of network characterstcs wth some sort of homogenous socal captal may be msleadng. Fnally, t would be desrable to have the number of network members ncreased. Because ths s tme-consumng durng ntervews, an alternatve would be to ask for three people that the respondent would consder askng for job help or nformaton. Ths mght provde a more accurate profle of the respondent s potental job contacts. In any event, I use these network varables as a proxy for the qualty of workers socal connectons n order to suggest how the Black/Whte wage gap may result from dfferent levels of socal resources. 2 Alternatvely, I could nclude the number (rather than the proporton) of network members employed or on welfare. Ths does not change the results presented. 3 If all of the cases wth network data are used, the.71 of Whtes contacts are employed at steady jobs, and.67 of Blacks contacts.