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

Authors

Jean Kimmel, W.E. Upjohn Institute for Employment ResearchFollow
Thomas J. Kniesner, Indiana University BloomingtonFollow

Series

Upjohn Institute Working Paper No. 93-19

**Published Version**

In Journal of Monetary Economics 42(2): 289-301

DOI

10.17848/wp93-19

Issue Date

April 1993

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 triennial 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.

Sponsorship

Financial support from the Office of the Vice-President for Research and the University Graduate School of Indiana University, Bloomington.

Subject Areas

LABOR MARKET ISSUES