  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
shift-share instruments to the universe of German firms. In line with theory,
we find that a doubling in tightness reduces firms' employment by 5 percent.
Taking into account the resulting search externalities, the wage elasticity of
firms' labor demand reduces from -0.7 to -0.5 through reallocation effects. In
light of our results, pre-match hiring cost amount to 40 percent of annual wage
payments.
