Working Paper: NBER ID: w15790
Authors: Paul Beaudry; David A. Green; Benjamin M. Sand
Abstract: In 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.
Keywords: employment; labor costs; job creation; elasticity; search and bargaining
JEL Codes: E24; J21; J23; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wages (J31) | Employment Rates (J68) |
| Wages (J31) | Job Creation Curve Elasticity (J23) |
| Outside Employment Opportunities (M59) | Employment Rates (J68) |
| Wages (J31) | Vacancy Costs (J63) |
| Vacancy Costs (J63) | Job Creation (J23) |
| Wages (J31) | Benefits of Filled Jobs (J68) |
| Benefits of Filled Jobs (J68) | Job Creation (J23) |