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The Intertemporal-Substitution Hypothesis is Alive and Well ( But Hiding in the Data)

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  • Kniesner, T.J.
  • Kimmel, J.

Abstract

According 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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Suggested Citation

  • 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.
    • Handle: RePEc:fth:indian:93-014
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    References listed on IDEAS

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    More about this item

    Keywords

    business cycles ; labour supply;

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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