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

Publication Date

4-1-1993

Series

Upjohn Institute Working Paper No. 93-19

**Published Version**

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

DOI

10.17848/wp93-19

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.

Issue Date

April 1993

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