The Flow Approach to Labor Markets

Abstract

The "flow approach" to labor markets builds up from the flows of workers and of jobs. It is based on three essential components, a specification of labor demand in terms of flows of job creation/destruction, a process of matching between workers and firms, and a process of wage determination where wages depend on the labor market prospects of employed workers and firms, We think that this approach gives the right basic picture of unemployment and unemployment dynamics, and of the relation between wage movements and the state of the labor market. The additional richness it naturally delivers also captures important implications of labor market mechanisms for macroeconomics. Finally, its structure is realistic enough to allow for a productive interaction with - and use of - micro-work and micro-evidence in both labor and product markets. This paper shows the structure of the approach and some of its implications. The first section develops a barebone model; the second adds the flesh.