Firm-to-firm labor flows and the aggregate matching function: A network-based test using employer–employee matched records

After finding nuanced networked structures in labour flows across different countries, I wanted to know if the workhorse model of labour economics was capable of explaining them. Similar as with well-mixed contagion models in epidemiology, the matching function in economics fails to reproduce such details, even when broken down into many local functions. This paper presents evidence on the limitations of this modelling tool and calls for a different approach to study labour flow networks.

The assumption of aggregate matching functions in labor markets is tested using a network configuration model for directed multigraphs. We use employer–employee matched records of the universe of employees and firms in Finland and find that aggregate matching functions, even at the level of submarkets, cannot explain the vast majority of the observed patterns of labor flows between firms. Our findings suggest the need for theoretical frameworks that take into account the structure of labor market frictions.