Labor Demand on a Tight Leash

Mario Bossler () and Martin Popp ()
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Mario Bossler: Institute for Employment Research (IAB), Nuremberg
Martin Popp: Institute for Employment Research (IAB), Nuremberg

No 16837, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We develop a labor demand model that encompasses pre-match hiring cost arising from tight labor markets. Through the lens of the model, we study the effect of labor market tightness on firms' labor demand by applying novel shift-share instruments to the universe of German firms. In line with theory, we find that a doubling in tightness reduces firms' employment by 5 percent. Taking into account the resulting search externalities, the wage elasticity of firms' labor demand reduces from -0.7 to -0.5 through reallocation effects. In light of our results, pre-match hiring cost amount to 40 percent of annual wage payments.

Keywords: labor demand; labor market tightness; wages; hiring cost; reallocation effects (search for similar items in EconPapers)
JEL-codes: D23 J23 J31 J60 (search for similar items in EconPapers)
Pages: 102 pages
Date: 2024-03
New Economics Papers: this item is included in nep-lma
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Citations: View citations in EconPapers (4)

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