ARCHIVED – Social Capital and Wages - Outcome of Recent Immigrants to Canada
2. Literature Review
The existing economic literature on social networks and wages is mainly based on job matching models. The theoretical effects of social relationships on job quality in terms of wages have been explored extensively (e.g. Montgomery 1991; Cahuc and Fontaine 2002). Particular consideration has been given to problems related to workers’ transition in the labour market in terms of employment status, wages and unemployment exits (Calvó-Armengol and Zenou 2005). According to these theoretical models, various types and patterns of social networks lead to better transitions from unemployment to work by reducing the cost of job search for potential employees and employers, and promoting the efficiency of the matching process. Specifically, theoretical models have suggested that obtaining a job through networking is associated with higher acceptance rates of job offers (Holzer 1987), higher reported job satisfaction (Granovetter 1995), longer job tenure (Simon and Warner 1992; Loury 2006) and lower quit rates (Datcher 1983), though not necessarily higher wages (Staiger 1990; Granovetter 1995; Calvó-Armengol and Jackson 2004).
On the empirical side, studies have examined the efficiency of networking in terms of the quality of jobs as mainly measured by the wage. Many studies have examined the direct relationship between the use of informal networks in finding jobs and labour market outcomes, while some researches focus on the effects of social capital resources or stocks on employment outcomes. There is mixed evidence on how social networks affect labour market earnings. On the one hand, a number of studies have found a positive relationship between measures of social capital and wages (e.g. Flap and Boxman 2001; Lai, Lin and Leung 1998). Earlier work by Granovetter (1973) concludes that, while immediate social networks (relatives and close friends) do have an impact on job transitions, weak ties (distant relationships, e.g. workmates) dominate strong ties for both transitions and wages. On the other hand, there is no evidence that using networks or informal job search methods affects occupational status (e.g. Bartus 2001), and there is mixed evidence on the effects of informal search methods on wages. Montgomery (1992) shows that networking has a positive impact on employment transition, but this does not imply higher wages, even when weak ties are used.
Some research has focused on the role social networks have played in securing jobs in certain industries or for particular groups. For example, Green, Tigges and Diaz (1999) show that the use of informal job search strategies, such as using personal contacts like friends or relatives during a job search, results in lower-paid jobs for Hispanics, whereas this strategy results in higher paying jobs for whites. Barros (2006) estimates a human capital model for cooperative managers and compares the results with the social capital model, based on data from Portugal in 2003. He concludes that cooperative managers’ earnings are a function of both human capital and social capital.
Borghans, Weel and Weinberg (2006) show that social interactions are an important determinant of labour market outcomes, including occupations and wages. They particularly focus on how the increased importance of people skills has affected the labour-market outcomes of under represented groups: the increase in the importance of people skills between the late 1970s and early 1990s may help explain why women’s wages increased more rapidly while the wages of blacks grew more slowly over these years relative to earlier years. Bayer, Ross and Topa (2005) use U.S. Census data to empirically detect the effect of social interactions among neighbours on labour market outcomes. They provide evidence that the increased availability of neighborhood referrals has a significant impact on a wide range of labour market outcomes including employment and wages.
Studies show that people with limited human and financial capital are particularly more likely to use social networks to help them succeed in the labour market. Elliot (1999) shows that less educated workers in high-poverty neighbourhoods were more likely to use informal connections to search for jobs and the informal contacts are the main resource through which these workers actually found work.
Given the difficulties and disparities in measuring social capital stock, some of the relevant research using job search methods as a proxy for social network resources indicates that use of social networks does not have strong effects on labour market earnings (e.g. Mouw 2002). Due to data limitations it is difficult to know exactly which method led to the observed job; most studies connect the forms of social capital to job search methods and use cross-sectional methods to estimate social capital effects. As a consequence there is still limited empirical evidence to test the theoretical questions: How do the characteristics of social networks, such as size, diversity and density, affect employment quality? Do the jobs acquired through informal networks pay higher or lower wages than similar jobs found via formal methods, considering unobserved individual heterogeneity?
Immigrants may behave differently from natives in terms of the kind of resources they rely on to access the labour market, especially in the initial periods of settlement and integration. There is evidence that particularly during the initial settlement period, social capital and personal ties influence immigrant economic performance significantly (Kunz 2005). While it is now well established in the migration literature that social capital is a resource that resides in interpersonal networks and that migrants draw upon it to find jobs, the effects of social networks on wages of immigrants vary considerably across studies.
For example, Amuedo-Dorantes and Mundra (2004) use the Mexican Migration Project (MMP) data to find that social networks not only affect the likelihood of finding employment, but they also play an important role in facilitating the economic assimilation of Mexican immigrants in the U.S. in terms of a higher hourly wage. Specifically, Aguilera and Massey (2003) indicate that social capital plays a more significant role in determining the wages of undocumented migrants than documented migrants. Aguilera and Massey use the same dataset as Amuedo-Dorantes and Mundra (2004) to find no relationship between job search method and wages among Mexican Immigrants, with the exception of a positive relationship between kin networks and formal sector employment among undocumented Mexican workers in the U.S. These findings suggest that social capital can act as a substitute for human capital, though only imperfectly, for those disadvantaged in the labour market, such as those with less human capital or with legal restrictions, to overcome employment barriers.
Livingston (2006) also uses the MMP data to identify network effects among Mexican immigrants in the US labour market. He used the method that each respondent employed to obtain the most recent U.S. job to examine network effects on employment, occupational status and wages. The study finds different effects of networks across gender. Women who used network-based job searches were less likely to obtain formal sector employment than women who found jobs through more formal channels, while using networks to find a job increased the likelihood that men would find work in the formal sector. As employment in the formal sector is related to wages, networks have different effects on wages.
Some empirical work focusing on Latin immigrants in the U.S. has revealed a negative relationship between network-based job search methods and employment outcomes. For instance, Smith (2000) suggests that using networks to obtain employment is associated with a significant decrease in wages and earnings.
The existing literature on the relationship between social capital or social networks and immigrant labour market outcomes is primarily for the U.S. context. As the availability of data with information on employment and wages along with detailed social network structure is relatively rare in the empirical literature on social networks in labour market, most studies have similar characteristics: they focus on specific groups of immigrants and using network-based job search methods or neighbourhoods as a proxy for social capital.
While little work has examined the social capital stock and employment qualities, a group of related studies lends some evidence on this issue by looking at ethnic or neighborhood characteristics as a proxy for social capital. The effects of social networks on immigrants’ employment status and earnings may differ significantly according to how social capital is defined and measured. For instance, employing home language as a proxy for social networks, Bertrand, Luttmer and Mullainathan (2000) uncover evidence that these social networks influence welfare participation in the United States. Chiswick and Miller (1996) measure social networks by the extent of linguistic concentration in the area where the immigrant resides in the U.S. They conclude that the concentration of the home language has a negative effect on earnings. Borjas (1995) looks at one element of social capital – ethnic capital as measured by residential segregation of ethnic groups, and finds that ethnic neighbourhoods negatively influence the economic performance of immigrants in the US.
In the context of Canada, despite the large immigrant population, attention has yet to be paid to the potential relationship between social networks and immigrant labour market performance. Again, probably due to the limitation of available data, existing related research in the context of labour market outcomes of immigrants to Canada also tends to use ethnic enclaves or neighborhoods as an indicator of social capital.
Using Census data from 1981 to 1996, Hou and Picot (2003) examine the association between living in a visible minority enclave and immigrants’ labour market outcomes in Canada’s three largest metropolitan areas – Toronto, Montréal and Vancouver. The results show that the association between exposure to own-group neighbours and employment is negative, but generally not significant. Exposure to own-group neighbours and working in a segregated occupation are positively, but not significantly, associated. Little association exists between exposure and employment earnings.
Warman (2005) uses Borjas’ measurement of ethnicity – concentration of co-ethnic group in the neighbourhoods between 1990 and 2000 to find a negative impact of enclaves based on country of birth on the ten-year wage growth of immigrants in Canada. While the results indicate a negative effect of enclaves on wage growth, little evidence is found of the effects of enclaves on changes in employment. Warman also points out that ethnic concentration has a divergent effect on different landing cohorts: a positive impact on the wage growth of the more recent cohorts and a negative impact on earlier cohorts.
Within the context of social network and immigrant labour market outcomes, a much-debated issue is the potential endogeneity of social capital effects. One explanation for the wage differentials is unobserved individual heterogeneity, which is likely to affect a person’s social network characteristics as well. How does social capital stock and wage status vary among immigrants with different characteristics such as ability and attitudes towards employment? However, the existing literature in the context of immigrant integration does not deliver endogenous social capital effects on wage outcomes. The present research attempts to examine the endogenous differential social capital effects of social networks on immigrants’ wages.
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