Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2003:18: Social Interactions and Unemployment

Peter Hedström (), Ann-Sofie Kolm () and Yvonne Åberg ()
Additional contact information
Peter Hedström: Nuffield College, Postal: Oxford University, New Road, Oxford OX1 1NF, UK
Ann-Sofie Kolm: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Yvonne Åberg: Department of Sociology, Postal: Stockholm University, SE-106 91 Stockholm, Sweden

Abstract: This paper is concerned with social interactions and their importance for unemployment. A theoretical model is specified in which the social and psychological costs of unemployment depend upon the unemployment level. The theoretical analysis reveals social multiplier effects, and shows that multiple unemployment equilibria may emerge. Data on all 20- to 24-year-olds living in the Stockholm metropolitan area during the 1990s are used to test key hypotheses derived from the model. The focus is on the role of neighborhood-based reference groups, and the results support the theoretical predictions: unemployment levels vary more across neighborhood-groups than what would be expected based on variation in observable characteristics, and individuals' transition rates out of unemployment appear to be strongly influenced by the unemployment level within their neighborhood-based reference groups.

Keywords: Social interaction; social norms; social multipliers; unemployment

JEL-codes: J64; Z13

36 pages, June 20, 2003

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