LABOR DEMAND, QUANTITY CONSTRAINTS OR MATCHING - THE DETERMINATION OF EMPLOYMENT IN THE ABSENCE OF MARKET-CLEARING

The two main approaches to modelling employment (the labour demand approach and the quantity constraint approach) are set in a general context of assumptions about the trading process in the labour market and the associated hiring costs. These two models are shown to be restrictive in this context: the former implying hiring costs independent of the tightness of the labour market and the latter implying a combination of this and infinite hiring costs. An alternative is proposed based on the search and matching literature. These three models are estimated and the search and matching model is found to be superior.