Endogenous Job Contact Networks

We develop a model where workers invest in job contact networks as an insurance against the risk of unemployment. Equilibrium job contact networks are highly connected and transmit information effectively when labor market turnover is moderate, whereas they are segmented into clusters for either high or low turnover. The equilibrium response of investment in networks to changes in labor market conditions generates a positive correlation between unemployment rate and proportion of jobs that are filled through network information transmission. These predictions are consistent with the empirical patterns which we document for the UK labor market.