Social contacts, neighborhoods and individual unemployment risk

Abstract

The aim of this paper is to empirically test the impact of social contacts on the individual unemployment risk and the probability of persisting unemployed over time controlling for the local context where the individual lives and creates friendships. We present evidence for a highly significant impact of social contacts on individual unemployment risk: social contacts reduce both the unemployment risk and the state dependence in unemployment. The disadvantage from having been unemployed in the previous period is smaller for individual with many social contacts and larger for individuals with limited social contacts. We assume that social interactions happen mainly locally in the neighborhood. We present evidence that neighborhood deprivation increases the individual unemployment risk, while neighborhood cohesion reduces the probability of unemployment in deprived neighborhood. These findings are consistent with the idea that individuals obtain information about job opportunities through a network of social contacts and unemployment may lead to a decay of social capital, making it more difficult to find employment in future periods.