Scholars and policy makers alike are increasingly interested in understanding how social capital shapes people’s economic lives. But the idea of social capital is an amorphous one. In this article, economists Judy Hellerstein and David Neumark define social capital as networks of relationships among people who are connected by where they live or work. Thus social capital, in contrast to human capital, resides in the connections among people rather than their individual characteristics.
The authors draw on survey evidence, case studies, and administrative data to document that social capital networks play an important role in improving wellbeing, especially in terms of better labor market outcomes. Labor market networks, they write, provide informal insurance or risk sharing, and they facilitate the transfer of information (about job opportunities for individuals, and about potential employees for businesses). Moreover, networked individuals’ choices and outcomes affect others in the network, a phenomenon known as peer effects.
The evidence suggests that when it comes to getting a job, networks are especially important to low-skilled workers and immigrants. Hellerstein and Neumark also report some limited evidence on how neighborhood networks may shape children’s health and educational outcomes. Throughout, they discuss how policy might strengthen (or inadvertently weaken) the beneficial effects of networks.