How Elastic is the Job Creation Curve?∗

We use search and bargaining theory to develop an empirically tractable specification of the job creation curve and to derive an instrumental variable strategy to estimate and test its validity. We estimate the job creation curve using city-level observations for 1970-2007. We find that U.S. city-industry level labor market outcomes conform well to restrictions implied by search and bargaining theory. 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 entrepreneurs when labor costs decline. ∗We thank Chris Bidner, David Card, Giovanni Gallipoli, Patrick Kline, Alex Lefter, Kevin Milligan and seminar participants at Bocconi University, Cambridge University, LSE, McGill University, the University of California – Berkeley, University of Essex, University of Bristol and the University of Montreal for helpful comments and suggestions. †University of British Columbia, and NBER ‡University of British Columbia and Research Fellow, IFS, London §York University. [email protected]