On Intertemporal Substitution and Aggregate Labor Supply

In this paper I present an econometric investigation of the implications of the intertemporal substitution hypothesis for aggregate employrnent in the United States. The tests are based on a version of the hypothesis with time-separable preferences. On the basis of the evidence produced, the hypothesis is quite successful in explaining fluctuations in aggregate employment, although almost totally unsuccessful in accounting for fluctuations in employee hours. These findings suggest that the hypothesis might have an important role to play in macroeconomic modeling, although they contradict attempts to account for aggregate fluctuations solely in terrns of continuous competitive equilibrium in labor markets.

Journal of Political Economy

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