A literature review establishes where your dissertation ‘fits in' to the existing body of knowledge.
However, many academic papers have very brief literature reviews, and sometimes they are confined to the introduction rather than being a separate section in their own right.
You may want to follow this route - or you may decide to omit the literature review entirely. But many students normally spend some time making a separate section in which they discuss the existing literature.
Why do one?
Because a literature review allows you to demonstrate, in essay format, that you understand and can analyse the existing literature. The literature review allows you to answer the implicit question ‘What is the existing state of knowledge on this topic?', and answer it in such a way that introduces any other work that you are doing.
The other key reason for doing a literature review is that it forces you to organise your thoughts. This can often make any theoretical or empirical work you do in other sections clearer, as you understand the topic more thoroughly.
How do I do one?
When researching your dissertation, it is not uncommon to read 20-30 journal articles. These will form the basis of discussion in any literature review. As you will probably have to read some articles anyway, the reading burden is not excessive.
Identifying which articles are important is a stumbling block. Asking members of your department or supervisors for key readings can get you started. Search engines such as Econlit are crude, but effective ways of searching for relevant papers (although they might miss some important contributions as they depend on how you phrase your search). Once you have a few recent papers you can normally use the bibliography to steer you towards further readings.
Of course, as well as reading the articles, you need to demonstrate that you understand them. The section 'Effective Reading' can help - in particular, many students waste time trying to understand overly complex and irrelevant journal articles. Being selective, and understanding what is important, can save huge amounts of time and angst.
The next step is planning what you are going to write. As discussed in the 'Essay Writing' section you might want to organise the section thematically.
Themes (sub-sections) might be different theories which try to explain a phenomenon, or they might discuss how the debate has evolved.