In Search of Labor Demand (David Green and Benjamin Sand)

Abstract:
This paper explores the estimation of an aggregate elasticity of labor demand when both the presence of search frictions and the role of entrepreneurs in new firm creation are taken into account. Using city-industry variation over four decades, we estimate a (long run) wage elasticity of employment demand to be close to -1 at the industry-city level and -0.3 at the city level. Our estimates highlight the importance of treating entrepreneurship as a scarce factor in the determination of labor demand. We use our estimates to evaluate the impact of large changes in the minimum wage on employment.