In Search of Labor Demand∗

We propose and estimate a novel specification of labor demand which encompasses search frictions and the role of entrepreneurs in new firm creation. Using city-industry variation over four decades, we estimate the wage elasticity of employment demand to be close to -1 at the industry-city level and -0.3 at the city level. We argue that the difference between these estimates reflects the congestion externalities predicted by the search literature. Our estimates also indicate that entrepreneurship should be treated 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. ∗We thank Chris Bidner, Bruno Decreuse, David Card, Giovanni Gallipoli, Patrick Kline, Alex Lefter, Kevin Milligan and Richard Rogerson for comments and Vadim Marmer for econometric advice. This paper incorporate some results previously circulated under the title ”The Elasticity of Job Creation”. †VSE, University of British Columbia, 1873 East Mall, Vancouver, Canada, V6T 1Z1, and NBER ‡VSE, University of British Columbia, 1873 East Mall, Vancouver, Canada, V6T 1Z1, and IFS London §York University, 1090 Vari Hall, 4700 Keele St., Toronto, ON., M3J 1P3. [email protected]