Labor Demand on a Tight Leash
General Economics
2026-04-10 v8 Economics
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.
Cite
@article{arxiv.2203.05593,
title = {Labor Demand on a Tight Leash},
author = {Mario Bossler and Martin Popp},
journal= {arXiv preprint arXiv:2203.05593},
year = {2026}
}