IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/3628.html
   My bibliography  Save this paper

Anticipated and Unanticipated Wage Changes, Wage Risk, and Intertemporal Labour Supply

Author

Listed:
  • Pistaferri, Luigi

Abstract

We address the question of how labour supply responds to anticipated wage growth, unanticipated wage growth, and wage risk. We use the 1989-93 panel section of the Bank of Italy SHIW, which collects individual-based quantitative expectation of future wage growth. The use of subjective expectations has several advantages. First, subjective expectations provide information on the evolution and riskiness of future wages that the econometrician may never hope to observe. Second, they allow to control directly for the forecast error, thus avoiding inconsistency in short panels. Finally, controlling for anticipated and unanticipated wage changes avoids the need of specifying instruments for the growth rate of wages, which is usually hard to predict. We find that the intertemporal elasticity of substitution is precisely estimated and slightly larger than previous micro estimates. A parametric permanent innovation in wages impacts positively the rate of growth of labour supply. The impact of wage risk is consistent with the theory, but of negligible magnitude.

Suggested Citation

  • Pistaferri, Luigi, 2002. "Anticipated and Unanticipated Wage Changes, Wage Risk, and Intertemporal Labour Supply," CEPR Discussion Papers 3628, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3628
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3628
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 176-215, June.
    2. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
    3. Casey B. Mulligan, "undated". "The Intertemporal Substitution of Work--What Does the Evidence Say?," University of Chicago - Population Research Center 95-11, Chicago - Population Research Center.
    4. Jappelli, Tullio & Pistaferri, Luigi, 2000. "Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth," European Economic Review, Elsevier, vol. 44(2), pages 337-358, February.
    5. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318, Elsevier.
    6. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-1085, December.
    7. Bernheim, B Douglas & Levin, Lawrence, 1989. "Social Security and Personal Saving: An Analysis of Expectations," American Economic Review, American Economic Association, vol. 79(2), pages 97-102, May.
    8. Francine D. Blau & Adam J. Grossberg, 1989. "Wage and Employment Uncertainty and the Labor Force Participation Decisions of Married Women," NBER Working Papers 3081, National Bureau of Economic Research, Inc.
    9. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1, June.
    10. David Card, 1990. "Intertemporal Labor Supply: An Assessment," Working Papers 649, Princeton University, Department of Economics, Industrial Relations Section..
    11. Charles F. Manski, 2000. "Economic Analysis of Social Interactions," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 115-136, Summer.
    12. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
    13. Bover, Olympia, 1989. "Estimating Intertemporal Labour Supply Elasticities Using Structural Models," Economic Journal, Royal Economic Society, vol. 99(398), pages 1026-1039, December.
    14. Gilbert Ghez & Gary S. Becker, 1975. "A Theory of the Allocation of Time and Goods Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 1-45, National Bureau of Economic Research, Inc.
    15. Hamish Low, 1999. "Self-insurance and unemployment benefit in a life-cycle model of labour supply and savings," IFS Working Papers W99/24, Institute for Fiscal Studies.
    16. John C. Ham, 1986. "Testing whether Unemployment Represents Intertemporal Labour Supply Behaviour," Review of Economic Studies, Oxford University Press, vol. 53(4), pages 559-578.
    17. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-543, May.
    18. Casey B. Mulligan, "undated". "Pecuniary and Nonpecuniary Incentives to Work in the U.S. During World War II," University of Chicago - Population Research Center 95-3, Chicago - Population Research Center.
    19. Luigi Pistaferri, 2001. "Superior Information, Income Shocks, And The Permanent Income Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 465-476, August.
    20. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Goods Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 46-82, National Bureau of Economic Research, Inc.
    21. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time Over the Life Cycle," NBER Chapters, in: The Allocation of Time and Goods over the Life Cycle, pages 83-132, National Bureau of Economic Research, Inc.
    22. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-754, Sept./Oct.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jorge González-Chapela, 2007. "On the Price of Recreation Goods as a Determinant of Male Labor Supply," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 795-824.
    2. Eric French, 2004. "The Labor Supply Response to (Mismeasured but) Predictable Wage Changes," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 602-613, May.
    3. R. Jason Faberman, 2010. "Revisiting the role of home production in life-cycle labor supply," Working Papers 10-3, Federal Reserve Bank of Philadelphia.
    4. McLaughlin, Kenneth J., 1995. "Intertemporal substitution and [lambda]-constant comparative statics," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 193-213, February.
    5. Abowd, John M & Card, David, 1987. "Intertemporal Labor Supply and Long-term Employment Contracts," American Economic Review, American Economic Association, vol. 77(1), pages 50-68, March.
    6. Floden, Martin, 2001. "The effectiveness of government debt and transfers as insurance," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 81-108, August.
    7. Casey B. Mulligan, 1999. "Substitution over Time: Another Look at Life-Cycle Labor Supply," NBER Chapters, in: NBER Macroeconomics Annual 1998, volume 13, pages 75-152, National Bureau of Economic Research, Inc.
    8. Chang, Yongsung, 2000. "Wages, business cycles, and comparative advantage," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 143-171, August.
    9. Lee, Chul-In, 2008. "On-the-job human capital investment and intertemporal substitution: New evidence on intertemporal substitution elasticity," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3350-3375, October.
    10. Steffen Andersen & Alec Brandon & Uri Gneezy & John List, 2014. "Toward an Understanding of Reference-Dependent Labor Supply: Theory and Evidence from a Field Experiment," Framed Field Experiments 00392, The Field Experiments Website.
    11. Philip Trostel & Ian Walker, 2006. "Education and Work," Education Economics, Taylor & Francis Journals, vol. 14(4), pages 377-399.
    12. Angus Deaton, 2016. "Measuring and Understanding Behavior, Welfare, and Poverty," American Economic Review, American Economic Association, vol. 106(6), pages 1221-1243, June.
    13. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
    14. Johanna Wallenius, 2011. "Human Capital Accumulation and the Intertemporal Elasticity of Substitution of Labor: How Large is the Bias?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 577-591, October.
    15. Daniel Aaronson & Eric French, 2009. "The Effects of Progressive Taxation on Labor Supply when Hours and Wages Are Jointly Determined," Journal of Human Resources, University of Wisconsin Press, vol. 44(2).
    16. Eatzaz Ahmad, 1995. "Progressive Taxation and the Life‐Cycle Model: An Application of the Theory of Firm," The Economic Record, The Economic Society of Australia, vol. 71(3), pages 248-258, September.
    17. Zamnius, Alexey & Polbin, Andrey, 2021. "Estimating intertemporal elasticity of substitution of labor supply for married women in Russia," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 64, pages 23-48.
    18. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, September.
    19. Manuel Toledo, 2006. "On the Intergenerational Persistence of Work Hours," 2006 Meeting Papers 226, Society for Economic Dynamics.
    20. Bils, Mark & Chang, Yongsung, 2003. "Welfare costs of sticky wages when effort can respond," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 311-330, March.

    More about this item

    Keywords

    labour supply; subjective expectations;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3628. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.cepr.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.