Labor Demand on a Tight Leash

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 16837

Classification and Topics

• Classification: Wirtschaft ; Labor Demand ; Mobility, Unemployment, Vacancies, and Immigrant Workers: General ; Wage Level and Structure; Wage Differentials ; Organizational Behavior; Transaction Costs; Property Rights
• Subject: labor demand ; labor market tightness ; wages ; hiring cost ; reallocation effects

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bossler, Mario ; Popp, Martin
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2024

Further information

• Last update: 10.03.2025, 11:42 AM CET