Social effects in employer learning: An analysis of siblings

• Do wages incorporate information on personal contacts?
• I study employer learning when related workers have correlated abilities.
• The theory is tested using data on the test scores and log wages of siblings.
• An older sibling has a larger impact on a younger sibling than vice versa.
• There is strong evidence of statistical nepotism in labor markets.

This paper examines whether wages are based on information about personal contacts. I develop a theory of labor markets with imperfect information in which related workers have correlated abilities. I study wage setting under two alternative processes: individual learning, under which employers observe only a worker's own characteristics, and social learning, under which employers also observe those of a relative. Using sibling data from the NLSY79, I test for a form of statistical nepotism in which a sibling's performance is priced into a worker's wage. Empirically, an older sibling's test score has a larger impact on a younger sibling's log wage than a younger sibling's test score has on an older sibling's log wage. The estimates provide strong support for social effects in employer learning.