Aggregate Employment and Intertemporal Substitution in the UK

On the basis of the results of this paper, theories that rest on intertemporal substitution and continuous market clearing do not appear to be supported by the evidence. The features of the estimates for the total number of employees do however suggest that maybe an extension of the theory to account for serial persistence, or the possibility of rationing in the labour market, might result in a role for intertemporal substitution in macroeconomic modelling. The structure of the paper is as follows. In section I, I present the theoretical model. Time series estimates and tests are in section II.In section III, an attempt is made to compare the estimates to alternative labour market models. I argue that, in principle, intertemporal substitution models predict similar correlations between employment and wage and price inflation as for example Sargan (1964)-type wage equations, and that it is not too surprising that they fit reasonably well to UK time series. There is an observational equivalence problem, which, nevertheless, should be possible to resolve. This and other conclusions are summed up in the final section.

The Economic Journal

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