Strength in Numbers: Networks as a Solution to Occupational Traps

TLDR

The new classical theory predicts that families in low‑skill occupations with low human capital remain poor across generations, while those in high‑skill occupations stay wealthy, even when average ability is equal. This paper proposes a community‑based network as an informal institutional mechanism to help families in the same neighbourhood or kinship group escape low‑skill occupational traps. A dynamic model shows that once such networks form, they substitute for inherited human capital and wealth, strengthen most rapidly in historically disadvantaged communities, and generate high intergenerational mobility. Using unique Indian data, the paper confirms these predictions and demonstrates that restrictive traditional networks decay while new mobility‑supporting networks emerge and grow over time.

Abstract

The "new classical" theory states that families in low-skill occupations with low levels of human capital can stay poor from one generation to the next, while families in high-skill occupations with correspondingly high levels of human capital stay wealthy, despite being endowed with the same level of ability on average. This paper proposes an informal institutional mechanism—the community-based network—through which families belonging to the same neighbourhood or kinship group can bootstrap their way out of such low-skill occupational traps. The insight from the dynamic model that is developed is that once they form, new networks providing mutual support to their members and substituting for inherited parental human capital and wealth will strengthen most rapidly in historically disadvantaged communities, generating a correspondingly high level of intergenerational mobility. These predictions are successfully tested using unique data from India. The analysis in this paper, coupled with an emerging empirical literature on networks and migration, provides a new perspective on mobility in developing countries, with restrictive traditional networks decaying even as new networks supporting collective mobility form and strengthen over time.