Intertemporal Labor Supply and Long Term Employment Contracts
AbstractIn this paper we compare the implications of a symmetric information contracting model and a dynamic labor supply model for changes in individual earnings and hours over time. The critical distinction between these models is whether earnings represent optimal consumption or payment for current labor services. We develop a simple test between labor supply and contracting models based on the relative variability of earnings and hours with respect to changes in productivity. If earnings represent consumption then changes in productivity generate smaller changes in earnings than hours. The opposite is true in the labor supply model. We apply our test to longitudinal data on male household heads fran the Panel Study of Income Dynamics and the National Longitudinal Survey of Older Men, focusing on individuals who do not change employers during the survey period. Neither model fits the data well. In both surveys, however, the contrihition of changes in productivity to changes in earnings is greater than the contribution to changes in hours. The data are more consistent with a labor supply interpretation, although the estimated labor supply elasticities suggest that changes in hours occur at fixed wage rates.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1831.
Date of creation: Feb 1986
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Publication status: published as Abowd, John and David Card. "Intertemporal Labor Supply and Long Term Employment Contracts," American Economic Review, Vol. 77, No. March 1987, pp. 50-68.
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- Abowd, John M & Card, David, 1987. "Intertemporal Labor Supply and Long-term Employment Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 50-68, March.
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- Altonji, Joseph G, 1986.
"Intertemporal Substitution in Labor Supply: Evidence from Micro Data,"
Journal of Political Economy, University of Chicago Press,
University of Chicago Press, vol. 94(3), pages S176-S215, June.
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- MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1059-85, December.
- Joseph Altonji & Christina Paxson, 1985.
"Job Characteristics and Hours of Work,"
Working Papers, Princeton University, Department of Economics, Industrial Relations Section.
578, Princeton University, Department of Economics, Industrial Relations Section..
- Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 37-50, January.
- Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
- Heckman, James J, 1974. "Life Cycle Consumption and Labor Supply: An Explanation of the Relationship Between Income and Consumption Over the Life Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 64(1), pages 188-94, March.
- Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct.
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