Scarce Workers, High Wages?

TL;DR

This study examines how increased labor market tightness in Germany from 2012 to 2022 has contributed to wage increases, especially for low-wage workers, and analyzes variations across sectors and regions.

Contribution

It provides new empirical estimates of the elasticity of wages with respect to labor market tightness using rich administrative data and instrumental variable methods.

Findings

Higher tightness explains 7-19% of wage increases.

Greater elasticities observed for new hires, high-skilled workers, and the service sector.

Tightness contributed to reducing wage inequality at the lower end of the wage distribution.

Abstract

Labor market tightness tremendously increased in Germany between 2012 and 2022. We analyze the effect of tightness on wages by combining social security data with unusually rich information on vacancies and job seekers. Instrumental variable regressions reveal positive elasticities between 0.004 and 0.011, implying that higher tightness explains between 7 and 19 percent of the real wage increase. We report greater elasticities for new hires, high-skilled workers, the Eastern German labor market, and the service sector. In particular, tightness raised wages at the bottom of the wage distribution, contributing to the decline in wage inequality over the last decade.