Modeling Labor Market Policy in Developing Countries: A Selective Review of the Literature and Needs for the Future

Abstract

[Excerpt] Sound labor market policy requires sound labor market models. Sound models have three characteristics. First, from a welfare economic point of view, the policy judgments are explicit, mutually consistent, and thoroughly worked out. Second, from a theoretical point of view, the models are sufficiently detailed and suitably rigorous. And third, from an empirical point of view, the models guide and are guided by solid quantitative evidence. This paper reviews models of labor markets in developing countries from both a positive and a normative point of view. The survey is selective in that it exposits only some of the more significant contributions to the literature and highlights the most important gaps and analytical needs.