The Intertemporal-Substitution Hypothesis is Alive and Well (But Hiding in the Data)
AbstractAccording to the intertemporal-substitution hypothesis, which underlies the typical empirical real business cycle model, cyclical fluctuations in employment and hours of work are optimizing labor-supply responses to short-run aggregate demand shifts. We demonstrate that previous empirical labor-supply research has used inappropriate data to test the intertemporal-substitution hypothesis. We estimate a fixed-effects life-cycle labor-supply model with more informative data, the triannual micro data of the Survey of Income and Program Participation. We find economy-wide wage elasticities of employment and hours worked per employee of +1.55 and +0.51, which support the intertemporal-substitution hypothesis and give econometric credibility to the labor-market specification of empirical real business cycle models.
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Bibliographic InfoPaper provided by W.E. Upjohn Institute for Employment Research in its series Upjohn Working Papers and Journal Articles with number 93-19.
Date of creation: Apr 1993
Date of revision:
intertemporal-substitution; cycle; Kneisner; Kimmel;
Other versions of this item:
- Kniesner, T.J. & Kimmel, J., 1993. "The Intertemporal-Substitution Hypothesis is Alive and Well ( But Hiding in the Data)," Papers 93-014, Indiana - Center for Econometric Model Research.
- J2 - Labor and Demographic Economics - - Demand and Supply of Labor
- I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
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