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

42 Pages Posted: 1 Mar 2010 Last revised: 24 Aug 2024

See all articles by Paul Beaudry

Paul Beaudry

University of British Columbia (UBC) - Vancouver School of Economics; National Bureau of Economic Research (NBER)

David A. Green

University of British Columbia (UBC) - Department of Economics

Benjamin Sand

University of British Columbia (UBC) - Department of Economics

Date Written: February 2010

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.

Suggested Citation

Beaudry, Paul and Green, David Alan and Sand, Benjamin M., How Much is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation (February 2010). NBER Working Paper No. w15790, Available at SSRN: https://ssrn.com/abstract=1560925

Paul Beaudry (Contact Author)

University of British Columbia (UBC) - Vancouver School of Economics ( email )

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National Bureau of Economic Research (NBER)

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David Alan Green

University of British Columbia (UBC) - Department of Economics ( email )

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604-822-5915 (Fax)

Benjamin M. Sand

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

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