Space and networks in the labor market

Abstract

Agglomeration economies occur when advantages are created and exploited due to the geographic clustering of firms within the same industry. We focus on one of the Marshallian microfoundational processes which produces agglomeration economies, i.e., labor market pooling. According to economic theory, advantages are created between geographically clustered, same-industry firms on the demand side, and local workers with industry-specific skills on the supply side. These advantages result in reduced labor search costs and improve the quality of matches between firms and workers. Other theories of agglomeration often cite the importance of social networks for labor market mobility. In this study, we take advantage of a strategic research site using unique data on the hiring process of high-technology companies in California. We study how spatial agglomeration interacts with labor market referral networks. Prior theories posit that space and networks reinforce each other so that firms in agglomerated industries would tend to hire people who are both local and networked. We find a subtle, multi-step process at play. Consistent with agglomeration accounts, at the first stage in which the applicant pool is formed, we find that networked candidates are more local than non-networked candidates. However, contrary to past understandings of the spatial aspect of embedded labor markets in agglomerations, on the demand side, networks are not spatially exclusionary. When firms screen these candidates, we find that networks serve as a substitute for space, with networked candidates having significantly higher hiring chances among more distant candidates. This, in essence, allows firms to geographically extend their recruiting horizon. But job offers are more likely to go to local applicants so that the net result of these two stages does not show networks as reinforcing spatial dynamics. To the extent that networks interact with space, it is in attracting skilled labor from outside of the local area, as firms in agglomerated industries do not rely exclusively on local labor markets to staff their rapid growth.