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.