Beggars cannot be choosers: Labor market tightness, hiring standards, wages, and hiring costs

This study analyzes how hiring standards, entry wages, and hiring costs are associated with labor market tightness. Using unique linked employer-employee data for small- and medium-sized firms in Germany, we find that pre-match search costs represent only 16 percent of total hiring expenditures, while post-match costs account for the remaining 84 percent. Instrumental variable regressions show no evidence that tighter labor markets are associated with higher entry wages. Instead, we find differences along two non-wage dimensions. First, firms hire workers whose general ability is lower relative to their existing workforce. Second, firms incur higher post-match hiring costs for these hires. A one standard deviation increase in labor market tightness is associated with a 0.1 standard deviation decrease in hiring standards, an 11 percent longer adaptation period, and 15 percent higher informal training hours for new hires. These findings suggest that, in tight labor markets, variation in hiring outcomes is reflected more strongly in hiring standards and post-hire training investments than in entry wages.