Since many individuals are immobile between city labor markets in the short run, the industrial structure of cities plays an important role in determining the national rate of unemployment. This paper argues that a city's frictional unemployment rate will be lower, the more industrially diversified is the city; that is, the more evenly distributed is employment across industries. The empirical work on 91 large SMSAs strongly supports the hypothesis. The difference in frictional unemployment rates between the twenty most and least diverse cities is estimated at about 2.4 percentage points.

Firms often view job applicant referrals from current employees as more informative than direct applications or referrals through formal labor market intermediaries such as placement firms. The authors argue that old boy networks reduce employers' uncertainty about worker productivity. Using Jovanovic's job matching model, they show that workers hired through the old boy network should (1) earn higher initial salaries, (2) experience lower subsequent wage growth on the job, and (3) stay on the job longer than otherwise comparable workers hired from outside the network. They find considerable support for this theory using data from the 1972 Survey of Natural and Social Scientists and Engineers.

Comparative advantage and the division of labor make geographic concentration of production within a nation profitable and cause many cities to be specialized in one or a few main industries. Specialized cities, however, suffer greater unemployment risk. The theory of compensating wage differentials predicts that individuals living in more specialized cities will be compensated in the form of higher wage rates. We study the effects of specialization on wages and unemployment in the United States. We find evidence of compensating wage differentials. That firms choose to locate in more specialized, higher-wage cities is indirect evidence of the gains to specialization.