Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 194: Testing Theories of Job Creation: Does Supply Create Its Own Demand?

Mikael Carlsson (), Stefan Eriksson () and Nils Gottfries ()
Additional contact information
Mikael Carlsson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Stefan Eriksson: Department of Economics, Uppsala University, Postal: PO Box 513, SE-751 20 Uppsala, Sweden
Nils Gottfries: Department of Economics, Uppsala University, Postal: PO Box 513, SE-751 20 Uppsala, Sweden

Abstract: How well do alternative labor market theories explain variations in net job creation? According to search-matching theory, job creation in a firm should depend on the availability of workers (unemployment) and on the number of job openings in other firms (congestion). According to efficiency wage and bargaining theory, wages are set above the market clearing level and employment is determined by labor demand. To compare these models we estimate an encompassing equation for net job creation on firm-level data. The results support demand-oriented theories of job creation, whereas we find no evidence in favor of the search-matching theory.

Keywords: Job Creation; Involuntary Unemployment; Search-Matching; Labor Demand

JEL-codes: E24; J23; J64

29 pages, May 1, 2006

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