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.