Factor demand modelling: the theory and the practice

Since the work of Cobb and Douglas [18], two main innovations have been introduced in applied factor demand analysis, i.e. the use of flexible functional forms and the modelling of dynamics, expectations, and the interrelatedness of the adjustment process. Recently, cointegration theory has provided an additional important contribution, yielding empirical content to the notion of equilibrium employed in economic analysis, encompassing both the idea of centre of gravity relationship, suggested byClassical economists, and the notion of market-clearing position, employed by Neoclassical economist. Also in the light of the most recent generalizations of the concept of cointegration, allowing for economic attractors changing over time, as the evolution of the structural features of the economy proceeds, this paper critically assess the key theoretical and empirical issues in factor demand analysis.