How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation
AbstractIn search and bargaining models, the effect of higher wages on employment is determined by the elasticity of the job creation curve. In this paper, we use U.S. data over the 1970-2007 period to explore whether labor market outcomes abide by the restrictions implied by such models and to evaluate the elasticity of the job creation curve. The main difference between a job creation curve and a standard demand curve is that the former represents a relationship between wages and employment rates, while the latter represents a relationship between wages and employment levels. Although this distinction is quite simple, it has substantive implications for the identification of the effect of higher wages on employment. The main finding of the paper is that U.S. labor market outcomes observed at the city-industry level appear to conform well to the restrictions implied by search and bargaining theory and, using 10-year differences, we estimate the elasticity of the job creation curve with respect to wages to be -0.3. We interpret this relatively low elasticity as reflecting a low propensity for individuals to become more entrepreneurial and create more jobs when labor costs are lower and variable profits are higher.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15790.
Date of creation: Feb 2010
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Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-13 (All new papers)
- NEP-BEC-2010-03-13 (Business Economics)
- NEP-LAB-2010-03-13 (Labour Economics)
- NEP-MAC-2010-03-13 (Macroeconomics)
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