We use a large panel dataset covering the period 1988–2010 to estimate county specific own‐wage elasticity of labor demand in the U.S. for four highly aggregated industries: construction, finance/insurance/real‐estate/service, manufacturing, and retail trade. Our estimation of a random parameter panel data model yields significant evidence of spatial variations in wage elasticity of labor demand. We relate the spatial variation in elasticity to differences in county characteristics like industry specialization, industry competition, levels of natural amenity and urbanization. Using a regression discontinuity approach we also find that probusiness states have higher labor demand elasticity.