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

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