  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.
