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Labour Demand Research: Towards a Better Match between Better Theory and Better Data

José Varejão
John T. Addison
Publication Year 
JEL Code 
D5 - General Equilibrium and Disequilibrium
J23 - Employment Determination; Job Creation; Demand for Labor; Self-Employment
J3 - Wages, Compensation, and Labor Costs
J4 - Particular Labor Markets
J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining
At first blush, most advances in labour demand were achieved by the late 1980s. Since then progress might appear to have stalled. We argue to the contrary that significant progress has been made in understanding labour market frictions and imperfections, and in modelling search behaviour and heterogeneous preferences. Perhaps most notable have been the improvements in data, in the form of longitudinal matched employer-employee data, and in techniques and algorithms (e.g. for solving heterogeneous parameter models). In short, the Cinderella status of the field is frankly overdrawn.  Nevertheless, a chief lacuna remains the need for a better match between theory and data. This paper provides a critical albeit eclectic assessment of these developments, along the dimensions of the static and dynamic theory of labour demand, wage formation, and estimation, noting advances and limitations. As is conventional, somewhat greater emphasis is placed on the latter.
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