The Causal Status of Social Capital in Labor Markets

Abstract

There is a rich tradition of research on how social capital operates in the labor market. Much of this research adopts a supply-side perspective, and examines how network factors influence job seekers’ success in the labor market. Recent research by Mouw (2003, 2006), however, has called into question whether the observed effects of social capital are causal in nature, or are spuriously due to the influence of social homophily between job seekers and their network ties. What has been missing in this discussion is the demand-side perspective of organizations that hire job-seekers. This essay considers the causal status of social capital from the organization’s perspective. While the organizational approach we discuss here offers its own challenges to causal inference, they are not the same ones confronting supply-side approaches. Far from being a feature which confounds causal inference, we argue that social homophily is instead a key mechanism by which organizations derive social capital. Seen through this lens, homophily is a tool that organizations can use to derive value. We develop an approach which can be used to bolster inferences about the causal status of social capital. We illustrate these ideas using data from a retail bank.

Keywords: Labor markets, social capital, social networks, demand-side hiring processes, causal effects

JEL Classification: C90, C93, C99, J20, J24, J60, J64, J69