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Labor Demand on a Tight Leash

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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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    Cited by:

    1. Mario Bossler & Ying Liang & Thorsten Schank, 2024. "The Devil is in the Details: Heterogeneous Effects of the German Minimum Wage on Working Hours and Minijobs," Papers 2403.17206, arXiv.org, revised May 2024.
    2. Erik-Benjamin Borschlein & Mario Bossler & Martin Popp, 2024. "Scarce Workers, High Wages?," Papers 2408.04508, arXiv.org, revised Nov 2024.
    3. Schlenker, Oliver, 2024. "The deadly consequences of labor scarcity: Evidence from hospitals," Working Papers 42, University of Konstanz, Cluster of Excellence "The Politics of Inequality. Perceptions, Participation and Policies".
    4. Popp, Martin, 2024. "Minimum Wages in Concentrated Labor Markets," IZA Discussion Papers 17357, Institute of Labor Economics (IZA).
    5. Börschlein, Erik-Benjamin & Bossler, Mario & Popp, Martin, 2024. "Scarce Workers, High Wages?," IZA Discussion Papers 17447, Institute of Labor Economics (IZA).
    6. Anja Bauer, 2024. "Accounting for qualification in mismatch unemployment," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 58(1), pages 1-23, December.

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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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