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Speaking of the Economy
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Speaking of the Economy
Sept. 20, 2023

The Importance of Social Capital

Audiences: General Public, Economists

Stephanie Norris explains the concept of social capital, its value in the economic development of communities, and the challenges of measuring it. Norris is a senior research analyst at the Federal Reserve Bank of Richmond.


Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guest today is Stephanie Norris, a senior research analyst at the Richmond Fed. Stephanie, welcome to the show.

Stephanie Norris: Thanks for having me, Tim. It's great to be here.

Sablik: You recently wrote an article for our Econ Focus magazine with Adam Scavette exploring social capital across our District. We'll put a link up to that piece in the show notes. To start our conversation, maybe you can explain what social capital is.

Norris: There's a lot of terminology and theories in the academic literature, but it's a helpful way to frame community characteristics that are hard to define.

The concept of social capital stems from this idea that social networks and relationships have value, not only to individuals but can also bring benefits to a community or society at large. Social capital can come from relationships within structured networks like membership in civic organizations, parent-teacher associations, or even a youth sports league, as well as more informal interactions within friend groups [or] neighborhoods or with work colleagues. Our interactions and connections can facilitate trust and help us develop shared norms and values that influence our actions and behaviors in a way that ultimately leads to benefits for the community.

To give you one example of how social capital can yield these positive benefits, some researchers use the term "generalized reciprocity" as a dimension of social capital. An example of generalized reciprocity could be something like watching over a neighbor's house when she's out of town, or really just doing someone a favor without any expectation of that favor being returned. Ultimately, this benefits the community. Other benefits include the efficient exchange of information and services, cooperation that facilitates collective action, a sense of community identity, and increased individual buy-in to community outcomes.

Sablik: Right. As you mentioned, these are concepts that are a little hard to define and, therefore, I imagine a little hard to measure because it's something that you can't directly observe or quantify as a researcher. What sorts of data do researchers use to get a sense of a community's social capital?

Norris: Just like there's not a consensus way to define social capital, there's no universal consensus on how to measure social capital or its outcomes. Even if we do know exactly what we want to measure, it's difficult to quantify things like being a good neighbor.

As a result, researchers often rely on proxy variables to represent social capital. Some use things like the number of civic or community-oriented establishments in a community to represent social capital. This might be things like the number of religious organizations, business associations, or even country clubs. Some data we have comes from surveys that ask respondents quantifiable measures, for example, asking how frequently they talk to their neighbors and how much they trust others in their community. Some surveys gather information about participation in social or civic organizations, things like rates of volunteerism or rates of church attendance. We also measure things like voter participation and census response rates.

These data are often only available at the national level, or maybe even the state level in some cases. But we can't use this information to compare social capital across communities.

Sablik: Before we dive into those comparisons, maybe it'd be useful to talk about what are the economic benefits of living in a community with higher levels of social capital?

Norris: Well, there are broad benefits to social capital. Individuals benefit from social interaction through better mental health, subjective well-being and even some physical health outcomes.

From an economics perspective, individuals value social capital as an amenity, just like they value good schools or low crime rates. That can make living in the community desirable. From a quantitative angle, this value is often reflected in a community's housing prices, for example.

But there's also potential for more indirect economic development gains from the amenity effect of social capital. For example, the USDA's Economic Research Service released a report in March in which they surveyed healthcare professionals living in small towns and rural communities about the factors that drove their decision about where to locate and practice medicine. They find that social capital — things like friendliness, community social opportunities, and even professional collegiality — is an important driver in the decision to locate or even to stay in a small town. So, in this case, social capital can help alleviate workforce shortages and reverse population declines.

Research suggests that social connections make a difference in labor market outcomes and might influence career trajectories and economic paths of individuals through things like mentorship, job referrals, or information sharing. You often hear it's not what you know, it's who you know when it comes to getting job opportunities. I would argue that what you know also matters. But we do know that a lot of connections to jobs are made through word of mouth and personal recommendations.

There's also evidence that social capital can support economic mobility. There's value in interacting with people from a diverse set of backgrounds who might be able to give you advice on joining a union, applying for college [or] people who could also serve as a role model.

Sablik: Circling back to this issue of measurement, in your article with Adam you look at a relatively new database called the Social Capital Atlas. Can you explain what that database is, how it came about, and what it's measuring?

Norris: The Social Capital Atlas comes from Raj Chetty and his team at Opportunity Insights, which is a research organization based at Harvard. A lot of their work is focused on identifying barriers to economic mobility and developing policy solutions that ensure all children have the opportunity to achieve economic success.

To look at social capital and its role in economic mobility, Chetty and his team use a unique approach to getting around the measurement problem that we talked about before. Using de-identified data from over 72 million Facebook users between the ages of 25 and 44, the researchers identify and measure three different dimensions of social capital.

The first dimension, economic connectedness, is a measure of cross-class interaction. This measures the extent to which lower income individuals are connected with people in higher income or higher socioeconomic brackets. This kind of social connection is great for sharing information about labor market opportunities and connecting people with resources that can support human capital development.

The second dimension, cohesiveness, represents the structure of a community's social networks, sort of like the density of social ties within a community. Communities with high levels of cohesiveness tend to have high levels of trust and solidarity. There's really a sense of we're all in this together.

The third dimension is civic engagement, which is used commonly in social capital research. Chetty and his co-authors use rates of membership in volunteering groups, as well as the density of civic organizations in a community, to represent civic engagement.

Earlier we talked about the limitations of traditional measures of social capital. Virtual social networks like Facebook are a relatively new phenomenon. Chetty and his team make the case that Facebook connections are reasonably representative of real-world social networks and connections. And since Facebook profiles have information about users' locations, the researchers constructed measures of the three social capital dimensions for nearly all communities across the country. They made this data publicly available through a data visualization tool, and that's the Social Capital Atlas. It is a full map of all communities, so you can do a real deep dive on the community you live in and you can compare that with your neighbor's communities.

Sablik: Using that tool, what does social capital look like across the Fifth District, which the Richmond Fed serves?

Norris: One trend that we see in the Fifth District is that economic connectedness tends to be higher in counties within large metro areas. For example, if we look at the average person within the bottom half of the socioeconomic distribution in Arlington County, Va., which is in the Washington, D.C. metro area, about seven out of 10 of their friends are in sort of that high-income bracket. If we look at Vance County in North Carolina, which is a more rural county, if you're in the bottom half of the income distribution there, only about two out of 10 of your friends are high income. So, we see much lower economic connectedness in Vance County than we do in Arlington.

One thing we noticed is that in areas where economic connectedness is low, cohesiveness tends to be higher. That's the second dimension of social capital that Chetty and his co-authors look at. Many counties in more rural parts of our District have high cohesiveness values. This can indicate deep networks of strong relationships within a community. This can foster high levels of trust and good adherence to social norms and coordination that can enable a community to achieve broad economic goals. So, this could really be an advantage for tight knit rural communities.

Sablik: Yeah, that's really interesting. It's not clear cut [that] by different measures cities do better and by other measures rural places seem to do better. How can all this information about social capital help to inform the leaders in these communities or policymakers more generally?

Norris: One of Chetty's key findings from the research based on this data and the Social Capital Atlas is that social capital — specifically interactions that cross socioeconomic boundaries, so economic connectedness — has a profound impact on economic mobility. Specifically, children who grew up in communities with significant cross-class interactions outearn children who grew up in communities in which social circles are highly segregated by socioeconomic status. So, policy solutions that remove barriers to interactions between folks from diverse backgrounds could improve economic mobility and ultimately reduce poverty.

More broadly, there's value in acknowledging and understanding the role that social capital plays in economic outcomes. Social capital is a valuable amenity, which we talked about. It makes living in communities desirable. Communities with high levels of trust and coordination are really well positioned to work together effectively on all kinds of initiatives, including economic development. So, in this case, social capital is an asset that can help communities connect to more tangible resources that can support their community goals. Policy or program solutions aimed at enabling and encouraging the development of social capital could really be an opportunity to indirectly support positive economic outcomes.

Sablik: Stephanie, thank you so much for coming on to talk with me today.

Norris: Thank you for having me.

Sablik: Listeners can find a link to the article and other pieces we discussed today on the show page. And if you enjoyed this episode, please consider leaving us a rating and review on your favorite podcast app.

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