# Frictional Unemployment on Labor Flow Networks

## TL;DR

This paper introduces a network-based model of labor markets where firms are connected through labor flow networks, explaining local unemployment patterns and their impact on macroeconomic indicators like the Beveridge curve.

## Contribution

It develops a novel network theory of labor flows that links firm connections to aggregate unemployment and wage phenomena, providing micro-foundations for key labor market patterns.

## Key findings

- Network topology significantly affects aggregate unemployment.
- Pareto-distributed connections lead to large unemployment fluctuations.
- The model explains micro-macro labor market relationships.

## Abstract

We develop an alternative theory 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 Beveridge curve, wage dispersion, and the employer-size premium. We apply our model to employer-employee matched records and find that network topologies with Pareto-distributed connections cause disproportionately large changes on aggregate unemployment under high labor supply elasticity.