Nepotism or Networking?: The Effectiveness of Social Networks in the Labor Market

This paper analyzes the effectiveness of social networks in finding jobs and estimates the value of job search network using the Korean Laber and Income Panel Study (KLIPS) dataset and utilizing the Difference-in-Difference Propensity Score Matching (PSM) methodology (Heckman et al., 1997). While the wide use of social networks in the Korean labor market is often perceived as ‘nepotism,’ this study confirms that social networks, by serving as an effective information transmitter between job search and recruitment, make a significant contribution to improving the adequacy of job matching in the domestic labor market. In order to verify the effectiveness of using social networks for getting jobs, this study looks into the cases of labor turnover using social networks and also not using it. In the aspect of individual satisfaction improvement relating to workplace and job duties, both cases of turnover turn out to experience an increased satisfaction by 2~3 points (on a 100-score scale). Meanwhile, as for the educational and technical adequacy improvement, no positive effects are found in the case of turnover without social networks, whereas the educational and technical adequacy improvement turns out to increase by 2.13 and 2.52 points, respectively, in the case of turnover using social networks. The effect of income increase through turnover using social networks registered 40,074 Korean won per month (as of 2010), which can be considered as the result from the improved educational and technical adequacy. Of all things being considered, the value of job search network per wage worker in the Korean society is estimated to be 18.72 million won in terms of life-cycle wage improvement, and 758.2 scores in terms of the improvement of working life satisfaction. Provided that the cash value of satisfaction score 1 is equivalent to ‘’ times 10,000 won, the aggregate value of job search network is estimated to be 18.72＋7.582 million won, which means the total amount of costs that a wage worker in the Korean society willingly pays to maintain and manage job networks for lifetime