Do Tight Labor Markets Pay Off for the Unemployed? Evidence from Austria

Abstract

This paper studies the impact of labor market tightness on employment outcomes for unemployed job seekers in Austria. Using administrative data from 2011 to 2022, we construct granular measures of labor market tightness based on regional and occupational vacancy-to-unemployment ratios. To address endogeneity concerns, we employ a shift-share instrumental variable strategy that leverages variation in tightness across occupations and regions. We find that a 1 percent increase in tightness raises the probability of finding a job within 3 months by 0.109 percentage points. Entry wages respond positively but modestly on average (elasticity of 0.015), with effects concentrated in high-tightness environments. In particularly scarce occupations, wage elasticities reach 0.075, indicating strong non-linear returns to tightness. Effects are larger for job seekers with lower pre-unemployment income or longer unemployment spells. Tighter markets also lead to higher job stability after reemployment, with increased likelihood of remaining employed beyond 12 months. These findings are consistent with standard search and matching models and underscore the role of labor market conditions in shaping job seekers’ bargaining power. This study provides new evidence on the benefits of tight labor markets for unemployed job seekers and informs policy efforts aimed at improving matching efficiency and mitigating labor shortages