Frictional Unemployment on Labor Flow Networks

We develop an alternative framework to the aggregate matching function in which workers search for jobs through a network of firms: the labor flow network. The lack of an edge between two companies indicates the impossibility of labor flows between them due to high frictions. In equilibrium, firms’ hiring behavior correlates through the network, generating highly disaggregated local unemployment. Hence, aggregation depends on the topology of the network in non-trivial ways. This theory provides new micro-foundations for the the Beveridge curve, wage dispersion, and the employersize premium. Using employer-employee matched records, we find that the empirical topology of the network, in conjunction with the supply elasticity, may be a major contributor of aggregate unemployment.

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