The Intertemporal Substitution of Work: What Does the Evidence Say?

Abstract

A variety of studies of intertemporal movements in wages and work effort are reviewed. I add new evidence and conclude that the evidence overwhelmingly indicates that workers are quite willing to intertemporally substitute labor supply and that too many economists have placed too much weight on the several problematic econometric studies that have utilized the PSID. The fundamental flaw in most previous studies is a failure to distinguish anticipated wage changes from those that are unanticipated or are artifacts of measurement error. Evidence for the kinds of intertemporal nonseparabilities advocated in the real business cycle literature is shown to be weak.

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LEVPROOF.PS Estimation of Trends in the Presence of Measurement Error.