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Intertemporal Substitution in Macroeconomics: Evidence from a Two-Dimensional Labour Supply Model with Money

Ali Dib and Louis Phaneuf

Staff Working Papers from Bank of Canada

Abstract: The hypothesis of intertemporal substitution in labour supply has a history of empirical failure when confronted with aggregate time-series data. The authors show that a two-dimensional labour supply model, adapted to an environment with money as originally proposed by Lucas and Rapping (1969) and Lucas (1972), performs very well. The overidentifying restrictions implied by the model are far from rejected. The estimated parameters of preferences are generally stable and meaningful. Furthermore, the estimated wage elasticities of labour supply are much higher than previously found in the literature.

Keywords: Business fluctuations and cycles; Labour markets; Econometric and statistical methods (search for similar items in EconPapers)
JEL-codes: C52 E24 E32 J22 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2005
New Economics Papers: this item is included in nep-mac
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