In a NY Times article, Kenneth Arrow, a Nobel laureate and Stanford professor suggests that how much you get paid depends on the number of connections you have, rather than your technical skills. He argues that if labor markets are truly efficient, then there would not be such a significant gap in income between workers with similar skills and credentials. He claims that properties such as intelligence, education, experience, and age are only account for half of that income gap. The other half is related to the number of connections that an employee has.

Arrow formulates a model that views employees’ wages as a function of competitive bidding among companies, rather than a typical function of supply and demand. It turns out that companies bid more aggressively for workers of whom they have favorable personal information about, such as their sense of humor or how reliable they are. This personal information is usually conveyed through personal contacts between the employee and someone in the company. Hence, the more connections a prospective employee has, the more likely it is that more companies obtain this information, thus increasing the bid amount.

Using this model, Arrow estimates that a worker with one connection would expect to earn $19,570, while five connections would earn $30,410. How does this stack up when compared to actual job statistics? Looking at workers in 1998 between 24 to 40 years old, whose highest level of education was high school, the average income for African-American workers was $26,223, while the average income for whites was $33,123. Using Arrow’s model, this would mean that the average African-American worker had connections to 3.2 companies, while the average white worker had connections to 5.7 companies. If this could be measured in some way, then perhaps this model can account for the wage gap. This effect however, is much weaker when it comes to jobs that require higher education and technical skills.

Sources:

http://query.nytimes.com/gst/fullpage.html?res=9A04E2DC163EF931A1575BC0A9629C8B63&sec=&spon=&pagewanted=1