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.
Whether it is for the whole economy or for submarkets, there are a number of problems that arise from viewing matching in aggregate terms, and here we mention a few. First, when an AMF is responsible of pairing up workers and vacancies, it is assumed that all matches are equally likely. This neglects the importance that specific firms have in reallocating labor within a submarket. Second, defining a submarket is an arbitrary choice that might be well suited for a specific problem, but not necessarily for a broader context. Since these classifications are usually built for taxonomic purposes, they are not designed to minimize inter-submarket flows and maximize intra-submarket, which would capture the structural information of labor market frictions. This problem has been pointed out by @cite_17 in their classical paper on structural unemployment:
@cite_17
1998598607
Examines the role that small firms play in the American labor market. The authors seek to dispel two commonly held misconceptions: that small businesses generate the vast majority of jobs and that small business owners face limited political influence. Empirical data from the U.S. Small Business Administration, the Bureau of Labor Statistics, and the Census Bureau for the mid-1980s as well as privately collected data are reviewed to determine the differences between large and small firms as employers. The share of new jobs created by small firms, the percentage of the workforce employed by small firms, and the longevity of jobs created by small firms reveal that while these firms are responsible for a disproportionate share of new jobs, small firm employment share has largely remained constant. This results from the fact that new firms, and the new jobs they produce, tend to be small; small firms do not often produce new, long-lived jobs. Compensation and working conditions are reviewed. Although small firm wages tend to be lower, the traditional explanations -- more favorable working conditions at small firms, union avoidance, and discouragement of shirking -- are shown to have minimal explanatory power. Rather, lowered non-labor input prices for large firms enables those firms to pay higher wages. Quit rates and applicants-per-vacancy reveal that intangibles such as job satisfaction fail to explain the compensation differential. Unionization rates and union desirability among employees reveals that small firms could be prime targets for organizing drives. Lastly, the political influence of small businesses and the wisdom of governmental aid to small businesses and statutory exemptions or lax enforcement are critically assessed. (CAR)