IDEAS home Printed from
   My bibliography  Save this paper

Labor demand and wage inequality in Europe - an empirical Bayes approach


  • Kasy, Maximilian
  • Pirmin Fessler


To what extent can changes in the distribution of wages be explained by changes in labor supply of various groups (due to demographic change, migration, or expanded access to education), and to what extent are other factors (technical and institutional change) at work? We develop a flexible methodology for answering this central question of labor economics, using an empirical Bayes approach, without imposing the restrictions on heterogeneity and on cross-elasticities of labor demand assumed by the literature. Our approach allows to reduce the variance of estimates by exploiting the information embodied in economic structural models, while avoiding the inconsistency and non-robustness of misspecified structural models.This approach also allows to overcome the issues associated with pretesting and the conventional duality of testing theories / imposing theories. We characterize the geometry and the mean squared error of our estimator. One of our key theoretical results explicitly describes the risk-function of empirical Bayes under an asymptotic approximation. Simulations confirm our characterizations and the fact that our estimator uniformly dominates unrestricted estimation over a large space of parameter values. In our empirical application, we analyze changes since 2003 of the wage distribution in the countries of the European Union, using the EU-SILC data. We find inverse elasticities of substitution which are significant but much smaller than comparable estimates for the US. CES-production functions seem to fit reasonably well, but fit declines with the number of types considered.

Suggested Citation

  • Kasy, Maximilian & Pirmin Fessler, 2015. "Labor demand and wage inequality in Europe - an empirical Bayes approach," Working Paper 242991, Harvard University OpenScholar.
  • Handle: RePEc:qsh:wpaper:242991

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qsh:wpaper:242991. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Brandon). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.