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Accounting For Labor Demand Effects In Structural Labor Supply Models

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Executive Summary

When assessing the effects of policy reforms on the labor market, most studies only focus on labor supply. The interaction of supply and demand side is not explicitly modeled, which might lead to biased estimates of potential labor market outcomes. This paper proposes a straightforward method to remedy this shortcoming. The authors use information on firms' labor demand behavior and feed them into a structural labor supply model, completing the partial analysis of the labor market on the microdata level. They show the performance and relevance of their extension by introducing a pure labor supply side reform, the workfare concept, in Germany and simulating the labor market outcome of the reform.

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