The Intertemporal Substitution Model of Labour Market Fluctuations: An Empirical Analysis

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Abstract
The paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply. First, log-linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations. Second, a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption. The influence of expected future real wages and interest rates is captured by the consumption variable. The empirical results do not support the intertemporal substitution model.

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