TY - JOUR AU - Beaudry,Paul AU - Green,David A. AU - Sand,Benjamin M. TI - How Much Is Employment Increased by Cutting Labor Costs? Estimating the Elasticity of Job Creation JF - National Bureau of Economic Research Working Paper Series VL - No. 15790 PY - 2010 Y2 - February 2010 UR - http://www.nber.org/papers/w15790 L1 - http://www.nber.org/papers/w15790.pdf N1 - Author contact info: Paul Beaudry Department of Economics University of British Columbia 997-1873 East Mall Vancouver, B.C. Canada, V6T 1Z1 Tel: 604/822-8624 Fax: 604/822-5915 E-Mail: paulbe@interchange.ubc.ca David A. Green Department of Economics University of British Columbia 997-1873 East Mall Vancouver, B.C. Canada, V6T 1Z1 E-Mail: green@econ.ubc.ca Benjamin M. Sand Department of Economics York University Canada E-Mail: bmsand@yorku.ca AB - 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. ER -