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Labor Demand on a Tight Leash

Author

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  • Bossler, Mario

    (Institute for Employment Research (IAB), Nuremberg)

  • Popp, Martin

    (Institute for Employment Research (IAB), Nuremberg)

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.

Suggested Citation

  • Bossler, Mario & Popp, Martin, 2024. "Labor Demand on a Tight Leash," IZA Discussion Papers 16837, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp16837
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    References listed on IDEAS

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    More about this item

    Keywords

    labor demand; labor market tightness; wages; hiring cost; reallocation effects;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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