The Intertemporal Substitution Model of Labour Market Fluctuations: An Empirical Analysis

Joseph G. Altonji

151 citations0/0 files storedThe Review of Economic Studies

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Labor market dynamics and wage inequality Monetary Policy and Economic Impact Economic theories and models

Abstract

The paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply. First, log-linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations. Second, a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption. The influence of expected future real wages and interest rates is captured by the consumption variable. The empirical results do not support the intertemporal substitution model.

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References

1977Time Series Analysis: Forecasting and Control 1978Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence 1977Understanding business cycles 1980Formulating and estimating dynamic linear rational expectations models 1981Output Effects of Government Purchases 1978Unanticipated Money, Output, and the Price Level in the United States 1975The Allocation of Time and Goods over the Life Cycle 1979Estimation and Control of a Macroeconomic Model with Rational Expectations

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