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How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation

Paul Beaudry (), David Green () and Benjamin Sand ()

No 15790, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E24 J21 J23 J3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-lab and nep-mac
Date: 2010-02
Note: EFG LS
References: View references in EconPapers View complete reference list from CitEc
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