Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/295860 
Year of Publication: 
2024
Series/Report no.: 
IZA Discussion Papers No. 16837
Publisher: 
Institute of Labor Economics (IZA), Bonn
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.
Subjects: 
labor demand
labor market tightness
wages
hiring cost
reallocation effects
JEL: 
J23
J60
J31
D23
Document Type: 
Working Paper

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