Neighborhood quality and labor market outcomes: Evidence from quasi-random neighborhood assignment of immigrants☆
Introduction
Widespread use of friends, relatives and acquaintances to search for jobs is a stylized fact.1 Personal contacts may convey information about job vacancies and recommend friends, relatives and acquaintances with similar personal characteristics as themselves to their employer. For employers, job referrals lower the search costs as well as the screening costs of applicants. For employees, job referral may speed up the job-finding process and, as suggested by Dustmann et al. (2011) lead to a short-termed wage premium due to reduced uncertainty about the worker productivity.
According to recent social network theories the quality of personal contacts is of key importance for job referral (Montgomery, 1994, Calvó-Armengol and Jackson, 2004).2 The higher the quality of personal contacts, the more useful the contacts are for job referral.
My main research question is whether the quality of the job information network affects labor market outcomes. In the first part of my analysis I provide tentative evidence from the Welfare Research Survey conducted in Denmark in 2006 among representative samples of natives and immigrants that the quality for contacts matters: unemployed respondents whose acquaintances (e.g. friends of friends, co-workers and neighbors) have a high employment rate have a higher job-finding rate, after controlling for other personal characteristics and area characteristics. Job seekers may thus receive information about job vacancies from employed neighbors among others. Therefore, living in a neighborhood with more unemployment may reduce job chances. If so, concentration of unemployed workers in certain neighborhoods increases employment inequality in society (see e.g. Montgomery, 1994). Results from studies using observational data are consistent with neighborhood job referral, i.e. individuals who live in the same or adjacent neighborhoods sometimes refer each other to jobs.3 By contrast, quasi-experimental and experimental studies find little role of neighborhood quality on adult labor outcomes.4
I argue that the Danish Spatial Dispersal Policy on Refugees which operated from 1986 until 1998 is an ideal quasi-experiment for investigation of whether the quality of the neighborhood matters for individual labor market outcomes. At the time of receipt of asylum, placement officers working in the central office of the Danish Refugee Council assigned refugee families to housing in different locations in Denmark, exclusively on the basis of a questionnaire with personal information like household size. The placement officers did not meet face to face with refugees at the time of assignment. I observe all personal characteristics known to the placement officers in the administrative registers used for the analysis and condition on them in the regressions. Conditional on these personal characteristics, characteristics of the neighborhood of assignment are valid instruments for characteristics of the current neighborhood of residence. Moreover, the approximately 15,400 refugee men subjected to the spatial dispersal policy were assigned to as many as 1710 different neighborhoods located in 245 different municipalities.5 In other words, the Danish Spatial Dispersal Policy provides extensive geographic variation in neighborhood characteristics which is an important strength relative to the existing quasi-experimental and experimental studies of neighborhood job referral.
Therefore, in the second part of my analysis I use detailed administrative register data for the sample of refugee men who had initially been assigned to a neighborhood by the Danish Refugee Council to provide quasi-experimental evidence on the quality of job information networks on individual labor market outcomes. To proxy for social interactions, I use neighborhood-based networks, i.e. connections between individuals living in the same neighborhood, in line with a number of previous studies.6 In particular, I provide two-stage least squares (2SLS) estimates of the causal effects of living in a socially deprived neighborhood on individual labor market outcomes. I define a neighborhood as socially deprived if the employment rate is at most 60%. As instrument for the indicator for current residence in a socially deprived neighborhood I use an indicator for assignment to a socially deprived neighborhood. Next, I estimate the effects of alternative, continuous measures of neighborhood quality (employment rates, average skill level, mean real annual earnings) and compare ordinary least squares (OLS) and propensity score matching (PSM) estimates to quasi-experimental results from instrumental variables (IV) estimation.
Using observational data, the studies by Topa (2001) and Hellerstein et al. (2011) find empirical evidence that residence-based job search networks are ethnically stratified. In that case the quality of the co-ethnic network should matter more for individual labor market outcomes than the overall quality of the neighborhood. In the third part of the analysis, I exploit the Spatial Dispersal Policy on Refugees to provide quasi-experimental evidence on the effects of the quality of the immigrant and co-ethnic networks on labor market outcomes of refugees. As before, I use the detailed administrative register data for the sample of refugee men who had initially been assigned to a neighborhood by the Danish Refugee Council. However, to proxy for social interactions, I follow Borjas (1995) and use neighborhood-based immigrant and co-ethnic networks, i.e. defined as connections between individuals of immigrant origin/the same national origin living in the same neighborhood.7 Specifically, I present 2SLS estimates of the effects of the quality of immigrant/co-ethnic men living in the neighborhood on individual labor market outcomes 2–6 years after immigration. As instruments I use the quality of immigrant/co-ethnic men living in the neighborhood of assignment in the year of assignment and an indicator for no other immigrant/co-ethnic men living in the neighborhood of assignment in the year of assignment. I measure quality in terms of the employment rate and the average skill level. Therefore, my paper combines two strands of literature: empirical network studies which use neighborhood-based networks and empirical network studies which use ethnicity-based networks.8
Previous studies on the impact of residence-based ethnic networks on labor market outcomes (Bertrand et al., 2000, Edin et al., 2003, Damm, 2009) use metropolitan areas/municipalities as the geographic unit of analysis. The empirical model used in these studies to identify the effect of the size as well as the interaction between the size and the quality of the ethnic group omits the quality of the local ethnic group; the direct effect of the quality of the local ethnic group is assumed to be captured by language/country of origin fixed effect. By instead using neighborhoods, I can disentangle the effect of the quality from the size of the immigrant/co-ethnic network in contrast to previous studies.
Finally, to shed light on how long it takes for a new resident to become part of the established networks in the neighborhood, I investigate the speed at which network effects operate in the neighborhood using the detailed administrative registers for refugee men who were initially assigned to neighborhoods by the Danish Refugee Council.
The next section provides tentative evidence on the importance of the quality and quantity of contacts on individual employment from the Welfare Research Survey conducted in Denmark in 2006 among random samples of natives and non-Western immigrants. Section 3 describes the construction of a balanced panel of male refugees from administrative register data and presents OLS and PSM estimates of living in a socially deprived neighborhood six years after immigration for the individuals in the balanced panel of male refugees. It then describes the Danish Spatial Dispersal Policy on Refugees and exploits it to provide quasi-experimental evidence on the effects of living in a socially deprived neighborhood and the effects of continuous measures of neighborhood quality on individual labor market outcomes of male refugees. Section 4 presents quasi-experimental evidence on whether residence-based networks of male refugees are ethnically stratified and on the speed at which network effects operate in the neighborhood. Section 5 offers conclusions.
Section snippets
Survey evidence on the importance of the social network for employment
In this section I use the Welfare Research Survey linked with administrative registers from Statistics Denmark to shed light on which types of social networks are more useful for job referral. The Welfare Research Survey was conducted in Denmark from February to November 2006 among a random sample of 1000 natives aged 18–45 and a random sample of 1000 immigrants (i.e. foreign-born individuals whose parents are also foreign-born or have foreign citizenship) from each of the following source
Effects of living in a socially deprived neighborhood on individual labor market outcomes of refugees
This section investigates empirically whether residence in a socially deprived neighborhood hampers individual labor market outcomes. The alternative hypothesis is that the adverse labor market outcomes of residents in socially deprived neighborhoods are entirely due to negative self-selection of individuals into these neighborhoods.
Ethnic stratification of networks
Recall from Section 2 that 26.3% of immigrants in the Welfare Research Survey had found their latest (wage earner) job through their social network. Table 1, Panel C, shows that 74.7% (87.2% of low-skilled) of immigrant survey respondents who found their latest job through their social network found it through other immigrants. This descriptive evidence suggests that immigrants’ job search networks are ethnically stratified.
Conclusion
The main purpose of this paper has been to investigate whether the quality of the neighborhood affects the individual’s labor market outcomes. I have shown that both Ordinary Least Squares and Propensity Score Matching estimation give biased estimates of the effect of neighborhood quality. The reason is that individuals sort across neighborhoods in terms of unobserved personal characteristics, violating the assumption of selection on observables. To deal with location sorting, I have exploited
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2023, Economics and Human BiologyCitation Excerpt :Correlational studies suggest heterogeneity with respect to sociodemographic characteristics such as gender, race-ethnicity, and socioeconomic status. These studies often find stronger associations of place with obesity in females versus males but find few consistent patterns with respect to other socio-demographic characteristics (Tcymbal et al. 2020; Duncan et al. 2012; Kranjac et al. 2021; Kranjac et al. 2019; Daniels et al. 2021; Galvez, Pearl, and Yen 2010; Kim, Cubbin, and Oh 2019; Jia et al. 2019). However, efforts to assess heterogeneity are absent from causal studies, and consequently, we have little understanding of how the effects of place might vary by individual.
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I have benefited from helpful comments and suggestions from two anonymous referees, Stuart S. Rosenthal, Tor Eriksson, Nabanita Datta Gupta, Christian Dustmann, Jonathan Wadsworth, Giovanni Peri, Michael Rosholm, Peter Jensen, Astrid Würtz Rasmussen and participants at the II Workshop on Urban Economics 2012, the NORFACE Migration Conference “Migration: Economic Change, Social Change” 2011, the EEA/ESEM Conference 2011, the CReAM workshop, September 2010, the Danish Microeconometric Network Workshop, Skagen 2010, the Aarhus University Immigration Workshop, November 2010, the VATT seminar in Helsinki, May 2010, the ECON ASB Seminar, December 2010 and the CIM workshop, August 2008. This research was carried out in collaboration with the Rockwool Foundation Research Unit and the Danish National Centre for Social Research. I thank Margrethe L. Thuesen and Charlotte Duus for research assistance. The project was financed by a grant from the Strategic Research Program for Welfare Research for the project “Integration of ethnic minorities”, Grant 24-03-0288 from the Danish Research Agency and a grant from the NORFACE program on Migration.