Social Capital and Unemployment : A Macro-Quantitative Analysis of the European Regions

Abstract

The policy of unemployment is probably one of the most controversial issues among economists, social scientists and politicians. In this article, we argue that European regions with higher levels of social capital will tend to have lower levels of unemployment. Using a macro-quantitative cross-sectional analysis of 134 European regions, we show that a great deal of variability in sub-national unemployment rates can be accounted for by a particular level of regionally aggregated measures of the density and depth of social networks between individuals. In other words, higher levels of social capital will lead to more efficient use of information about the labour market, to lower search and transaction costs on both sides of the market, to a higher quality of applicants, to the efficient placement of individual workers, to less conflict between insiders and outsiders and to more intensive efforts to find work. All in all, higher levels of social capital can be expected to limit the numbers of unemployed. Even when applying simultaneous equation modelling to counter against a possible endogeneity problem, our findings remain robust.