Social networks and inequality

About half of all vacancies are filled through networks of personal contact. We consider the Arrow-Loury conjecture that such labor market networks exacerbate inequality. Our central result is that referral networks display threshold behavior. Above a critical density of referrals, qualified workers at all levels of the network are recruited with probability one. Below the threshold, the probability of referral falls exponentially and workers low in the hierarchy are hired with probability zero: an underclass emerges. (C) 2003 Elsevier Science (USA). All rights reserved.