Title: Party On: The Labor Market Returns to Social Networks in Adolescence

Abstract: We investigate the returns to adolescent friendships on earnings in adulthood. Using data from the National Longitudinal Study of Adolescent to Adult Health, we document that individuals make investments to accumulate friends in addition to educational investments. Because both education and friendships are jointly determined in adolescence, OLS estimates of their returns are biased. To estimate the causal returns to friendships, we implement a novel procedure that assumes the returns to schooling range from 5 to 15% (as the literature has documented), and instrument for friendships using homophily (similarity) measures among peers to obtain bounds on the returns to friendships. We find that having one more friend in adolescence increases earnings between 7 and 14%, which is substantially larger than the OLS estimates: measurement error and omitted variables lead to significant downward bias. We also find suggestive evidence that although some friendships generate larger returns in the labor market (close friendships, friendships with high SES individuals), most friendships appear to have positive returns. Individuals with more friendships in adolescence obtain more schooling and become more social and connected adults, in turn making them more likely to work and to work in higher paying occupations where social skills are rewarded.