  We develop a labor demand model that encompasses pre-match hiring cost
arising from tight labor markets. Through the lens of the model, we study the
effect of labor market tightness on firms' labor demand by applying novel
Bartik instruments to the universe of administrative employment data on
Germany. In line with theory, the IV results suggest that a 10 percent increase
in labor market tightness reduces firms' employment by 0.5 percent. When
accounting for search externalities, we find that the individual-firm wage
elasticity of labor demand reduces from -0.7 to -0.5 at the aggregate level.
For the 2015 minimum wage introduction, the elasticities imply only modest
disemployment effects mirroring empirical ex-post evaluations. Moreover, the
doubling of tightness between 2012 and 2019 led to a significant slowdown in
employment growth by 1.1 million jobs.

General Economics;Economics