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

Jean Kimmel (jean.kimmel@wmich.edu)

No 93-19, Upjohn Working Papers from W.E. Upjohn Institute for Employment Research

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.

Keywords: intertemporal-substitution; cycle; Kneisner; Kimmel (search for similar items in EconPapers)
JEL-codes: I3 J2 (search for similar items in EconPapers)
Date: 1993-04
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