  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.
