@article{5d4ac346a59b4d138a404e038cb3304b,
title = "Testing whether unemployment represents intertemporal labour supply behaviour",
abstract = "In the Lucas-Rapping (1969) model of the labour market, fluctuations in unemployment represent individuals optimally adjusting their labour supply behaviour in response to fluctuations in wage rates over the business cycle. In this paper I propose and implement a misspecification test of the Lucas-Rapping treatment of unemployment as labour supply behaviour using panel data. This test extends previous such work with micro data by simultaneously allowing for intertemporal substitution, uncertainty and endogenous unemployment. Using the standard specification of intertemporallabour supply behaviour, I find strong evidence against this interpretation of unemployment. There are two possible interpretations of the test results. The first is that it is necessary to turn to alternative models of the labour market in which unemployed workers are off a supply function. The second is that the test results indicate the necessity of moving to more complex models of intertemporal substitution. However, given current econometric techniques and data sets, these alternative models of intertemporal substitution will be extremely difficult to test.",
author = "Ham, {John C.}",
note = "Funding Information: Earlier versions of the paper were circulated under the titles {"}Testing for the Absence of Constraints in a Life-Cycle Model of Labour Supply{"} and {"}Testing Whether Unemployment Represents Leisure in a Life-Cycle Model of Labour Supply{"}. Portions of Section 2 of the paper are drawn from my thesis, and I owe a substantial debt to my thesis committee members, Orley Ashenfelter, James Brown, and Richard Quandt. The basic ideas for the paper were developed at the Summer Labour Workshop, University of Warwick, July 1982 and at a Conference on Labour Supply Estimation, Princeton University, March 1983. The paper was presented at a Conference on Labour Economics, McMaster University, April 1983, the SSRC Study Group in Econometrics, July 1983, the 1983 Christmas meetings of the Econometric Society, and a conference on Search, Unemployment and Labour Supply, University of Manchester, July 1984. It was also presented in workshops at Bristol, Hull, Manchester, Michigan, Queens and Wisconsin. I am extremely grateful for the important and useful comments received from participants in these seminars and conferences, as well as other individuals, including J. Altonji, R. Blundell, M. Browning, G. Chamberlain, A. Deaton, Jane Ham, J. Hausman, J. Heckman, D. Hendry, C. Hsiao, G. Jakubson, M. King, B. Lalonde. G. Mizon, T. Mroz, J. Pencavel, I. Walker and two anonymous referees. I am solely responsible for any errors. Generous financial support was provided by the Social Sciences and Humanities Research Council of Canada, the Institute for Policy Analysis, University of Toronto, and the Summer Labour Workshop at the University of Warwick.",
year = "1986",
month = aug,
doi = "10.2307/2297606",
language = "English (US)",
volume = "53",
pages = "559--578",
journal = "Review of Economic Studies",
issn = "0034-6527",
publisher = "Oxford University Press",
number = "4",
}