The Effects of Social Networks on Job Search Behavior and Labor Market Success∗

In this paper we analyze the influence of social networks on job search behavior of unemployed individuals. Standard theory suggests that people with strong networks utilize informal channels more often and—since the low search costs increase the value of unemployment—set higher reservation wages. We use the IZA Evaluation Dataset—an extensive novel data set con-taining information on 18,000 individuals interviewed shortly after entering unemployment—to test these hypotheses. The empirical findings underscore the established importance of networks on job search behavior. Individuals with strong networks set a higher reservation wage, use informal more often and sent out more applications. In terms of expectation, they also have a more optimistic outlook than people with weak networks