rational forecasts or social opinion dynamics identification of interaction effects in a business climate survey this paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions we study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem the aggregate dynamics of the individuals decisions can be analyzed via the stochastic process governing the ensemble average of choices numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics this approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization our application to a well known business climate index provides strong indication of social interaction as an important element in respondents assessment of the business climate

real and perceived losses from unemployment a cross country study this article compares the unemployment rate ur as a measure of inefficiency with several other potential measures across 18 organization for economic co operation and development oecd countries results show that the ur is not a very good measure of relative inefficiency between countries it overestimates the number of individuals who would get jobs if the market is clear the dead weight losses dwls of ur are remarkably low even in high unemployment countries and the aggregate perceived monetary losses by the unemployed as a proportion of gross domestic product gdp are also uniformly low although inframarginal individuals in some countries may perceive their losses to be high

nonlinear expectations in speculative markets evidence from the ecb survey of professional forecasters chartist and fundamentalist models have proven to be capable of replicating stylized facts on speculative markets in general this is achieved by specifying nonlinear interactions of otherwise linear asset price expectations of the respective trader groups this paper investigates whether or not regressive and extrapolative expectations themselves exhibit significant nonlinear dynamics the empirical results are based on a new data set from the european central bank survey of professional forecasters on oil price expectations in particular we find that forecasters form destabilizing expectations in the neighborhood of the fundamental value whereas expectations tend to be stabilizing in the presence of substantial oil price misalignment

real wages in the business cycle and the theory of income distribution an unresolved conflict between theory and facts in mainstream macroeconomics the focus of this article is the recurring tension between mainstream macroeconomics and observed facts in connection with the difficult task of providing explanations of the business cycle consistent both with the traditional theory of income distribution and with the empirical evidence concerning the co movements of real wages and employment over the cycle the attempts to reconcile facts and theory have led to the continuous introduction of specific and arguably ad hoc hypotheses in contrast with the search for greater theoretical rigour claimed by the various streams of macroeconomic modelling subsequent to the neo classical synthesis in addition the specific assumptions introduced in the models or their implications are in turn often contradicted or at best not confirmed by subsequent empirical research it is suggested in the conclusions that the difficulty of keeping together in a simple and consistent framework theory and facts reflects the flawed theoretical foundations of mainstream theory

finite sample bias in iv estimation of intertemporal labor supply models is the intertemporal substitution elasticity really small the empirical literature on intertemporal labor supply behavior documents that the intertemporal elasticity of substitution of labor supply is very low with a plausible range of zero to 0 2 drawing upon the literature on the distribution of instrumental variables iv estimators this paper demonstrates that this conventional wisdom is erroneous because it does not take into account the severe finite sample bias in these estimates that arise from weak instruments this paper adopts several approaches to adjust for the problems induced by these weak instruments the empirical results show that when uncorrected for finite sample bias the two stage least squares 2sls estimate of the elasticity is essentially zero as in most of the previous studies with its valid confidence interval being open ended however when corrected for finite sample bias the estimate becomes approximately 0 5 with a much tighter confidence interval

the intertemporal substitution model of labour market fluctuations an empirical analysis 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

credit constraints and the labour supply of immigrant families in canada the hours of work decisions in immigrant and nonimmigrant families are compared using an intertemporal labor supply model estimated over data from the 1981 and 1991 census of canada surveys the family investment hypothesis is evaluated the hypothesis states that the immigrant family is unable to borrow in the first years after migration and that the immigrant wife responds by working longer hours so as to support family consumption and her husband s labor market adjustment the empirical evidence in general supports the hypothesis since credit constraints are found to significantly distort the labor supply decisions of recently arrived immigrant families

crude awakening behind the surge in oil prices the first few months of 2008 saw crude oil prices breach one barrier after another they topped 100 a barrel for the first time on feb 19 then rose past 103 76 about two weeks later surpassing the previous inflation adjusted peak established in 1980 in april and early may oil prices pushed past 110 and then 120 a barrel and beyond these milestones reflect a new era in oil markets after the tumult of the early 1980s prices remained relatively tame for two decades in both real and nominal terms this long stretch of stability ended in 2004 when oil topped 40 a barrel for the first time then embarked on a steep climb that continued into this year modern economies run on oil so it s important to understand how recent years with their surging prices differ from the preceding two decades a good starting point is strong demand which has pushed world oil markets close to capacity new supplies haven t kept up with this demand fueling expectations that oil markets will remain tight for the foreseeable future a weakening dollar has put upward pressure on the price of a commodity that trades in the u s currency and because a large share of oil production takes place in politically unstable regions fears of supply disruptions loom over markets these factors have fed the steady sometimes swift rise of oil prices in recent years their persistence suggests the days of relatively cheap oil are over and the global economy faces a future of high energy prices how they play out will shape oil markets and determine prices for years to come

trend inflation sticky prices and expectational stability abstract micro evidence indicates that each period a fraction of prices is kept unchanged under a positive trend inflation rate in a sticky price model based on this evidence recent research shows that high trend inflation is a serious cause for indeterminacy of rational expectations equilibrium under the taylor rule this paper examines implications of trend inflation for expectational stability of the equilibrium an empirically plausible calibration of the model demonstrates that a fundamental rational expectations equilibrium is likely to be expectationally stable even in cases of indeterminacy induced by high trend inflation

expectations driven distortions in the foreign exchange market this paper explores the phenomenon of lasting deviations of the exchange rate from its fundamental value in the foreign exchange market motivated by empirical observations a chartists fundamentalists model is developed in which boundedly rational agents repeatedly choose between technical and fundamental trading rules to determine their speculative investment positions crucial for the dynamics is how the traders perceive the fundamental exchange rate this perception process is based on psychological evidence simulations give rise to bubbles but simultaneously display quite realistic exchange rate dynamics unit roots in the exchange rates fat tails for returns and volatility clustering

hours flexibility and retirement i introduction standard models of labor supply depict workers as choosing to work any positive amount of hours they wish at the competitive wage paid to persons of their type implicit in these models is the assumption that employers offer to workers at a particular wage a menu of infinitely many hours options from which workers may choose however this assumption seems fundamentally at odds with how the labor market functions in particular the distribution of weekly hours of work suggests that workers may be offered only a limited set of hours options by the employers 1 this study examines how employer imposed minimum hours of work requirements affect workers retirement decisions 2 we present a simple theoretical framework which shows that workers who cannot lower their hours of work in one period are more likely to retire by some subsequent date than workers not so constrained the intuition is straightforward given his characteristics and the wage he commands there is a particular hours level which a person desires to work in any period equivalently between any two time periods a worker initially working a given amount of hours desires that his hours change over time by a particular amount for workers with jobs that feature flexible hours the actual change in hours worked over time always perfectly matches the desired change if the worker desires to withdraw from the labor force then he does so if he desires to work fewer positive hours in the later period he changes his labor supply to precisely the desired level for workers with the same desired change in labor supply but who face hours constraints the only way to lower hours of work from one positive amount to another is to change jobs because such job changes are associated with transition costs the worker chooses from among a set of less than ideal options he can continue at the present job and be overemployed alternatively he can pay a transition cost and work the desired hours level in a new job or he can withdraw completely from the labor force thus unlike the worker whose hours are flexible the hours constrained worker retires both when he desires to work 0 h and when he wishes to work some positive amount less than he did previously but faces relatively high transition costs we tested the prediction that hours constrained workers are more likely to retire over time using a sample of retirement aged individuals from the health and retirement study hrs we found that a large fraction of workers aged 55 64 yr cannot lower their usual weekly hours of work in 1992 these constraints are prevalent for both men and women among people working different hours level and across all types of jobs exploiting the panel feature of the data and using a series of empirical tests we found that hours constrained workers are much more likely than their unconstrained peers to be retired by 1996 we document few differences in observed characteristics between constrained and unconstrained workers suggesting that the results do not derive from differences in latent retirement propensities across workers or to unmeasured job characteristics moreover we controlled carefully for demographic and job information we also conducted some simple tests to assess the likelihood that the results derive from sorting by job type constrained or unconstrained or simple measurement error and found that our main estimates continue to obtain the study s emphasis that hours constraints make it difficult for workers to satisfy changing labor supply preferences without changing jobs is also the main focus of altonji and paxson 1992 these authors showed that in a sample of prime aged women events likely to generate large changes in labor supply preferences such as the birth of a child or a child starting school tend to be associated with large changes in hours worked only for persons who change jobs

on the predictive accuracy of crude oil futures prices abstract this paper evaluates the predictive accuracy of 1 3 6 9 and 12 month ahead crude oil futures prices for 1991 01 2001 12 in addition to testing for unbiasedness a naive forecasting model is constructed to generate comparable forecasts as benchmarks our empirical findings reveal that futures prices and naive forecasts are unbiased at all forecast horizons however the 1 and 12 month ahead futures prices are the only forecasts outperforming the naive suggesting their potential usefulness in policy making continuing political instability of the middle east and the inability of opec to offset market sentiment among other factors may in the future adversely affect the predictive accuracy of the 1 and 12 month ahead futures prices accordingly caution must be exercised when utilizing such prices as a forecasting tool

oil and the macroeconomy since the 1970s economists have long been intrigued by empirical evidence that suggests that oil price shocks may be closely related to macroeconomic performance this interest dates back to the 1970s the 1970s were a period of growing dependence on imported oil unprecedented disruptions in the global oil market and poor macroeconomic performance in the united states thus it was natural to suspect a causal relationship from oil prices to u s macroeconomic aggregates since then a large body of work has accumulated that purports to establish this link on theoretical grounds and to provide empirical evidence in its support we do not attempt a comprehensive survey of this literature but rather provide an idiosyncratic synthesis of what we view as the key issues in this debate and the insights gained over the last 30 years the timing seems right for such an account although the experience of the 1970s continues to play an important role in discussions of the link between oil and the macroeconomy there have been a number of new oil price shocks since the 1970s notably the 1986 collapse of oil prices and the 2000 boom in oil prices as well as the oil price increases associated with the 1990 1991 gulf war and the 2003 iraq war given this richer case history we are arguably in a better position than two decades ago to distinguish the idiosyncratic features of each oil crisis from the systematic effects increases in oil prices have been held responsible for recessions periods of excessive inflation reduced productivity and lower economic growth in this paper we review the arguments supporting such views first we highlight some of the conceptual difficulties in assigning a central role to oil price shocks in explaining

when firms make sense of environmental agendas of society abstract the objective of this article is to present arguments for the need to obtain knowledge about how firms make sense of environmental agendas of society several empirical studies point out that highly formalized and rational management methods to manage environmental decisions are not appropriate in a firm s planning theoretical contributions within the field of organizational theory are critical to the rational actor approach that concentrates on firms as economic units acting in rational ways in order to increase profit instead recent organizational theories suggest using sociocultural theory in analyzing a firm s interpretation of societal agendas methods and results from an empirical qualitative case study based upon non rationalistic theory are presented and discussed the theoretical discussion and the empirical results call for a need to broaden environmental thinking about how to motivate firms to act in an environmental manner

increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle a challenge to models of equilibrium indeterminacy based on increasing returns is that required increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor we show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to a plausible level and make it invariant to the relative risk aversion in labor consequently indeterminacy and sunspot driven fluctuations can emerge for plausible increasing returns regardless of the relative risk aversion in labor our model generates reasonable dynamics in terms of matching the business cycle and sunspot shocks become more important with labor market friction

intertemporal substitution in labor supply evidence from micro data the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics the analysis of social security and pensions and the study of life cycle patterns of work this paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature the first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation the second approach is to estimate a first difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations the results indicate that intertemporal substitution elasticity for married men is positive but small

biases in macroeconomic forecasts irrationality or asymmetric loss empirical studies using survey data on expectations have frequently observed that forecasts are biased and have concluded that agents are not rational we establish that existing rationality tests are not robust to even small deviations from symmetric loss and hence have little ability to tell whether the forecaster is irrational or the loss function is asymmetric we quantify the exact trade off between forecast inefficiency and asymmetric loss leading to identical outcomes of standard rationality tests and explore new and more general methods for testing forecast rationality jointly with flexible families of loss functions that embed quadratic loss as a special case an empirical application to survey data on forecasts of nominal output growth demonstrates the empirical significance of our results and finds that rejections of rationality may largely have been driven by the assumption of symmetric loss

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

real business cycles a new keynesian perspective the debate over the source and propagation of economic fluctuations rages as fiercely today as it did 50 years ago in the aftermath of keynes s the general theory and in the midst of the great depression today as then there are two schools of thought the classical school emphasizes the optimization of private economic actors the adjustment of relative prices to equate supply and demand and the efficiency of unfettered markets the keynesian school believes that understanding economic fluctuations requires not just studying the intricacies of general equilibrium but also appreciating the possibility of market failure on a grand scale

intertemporal substitution in labor supply micro evidence from rural india abstract this paper tests the hypothesis of intertemporal substitution in labor supply using time allocation data on adult male and female members of agricultural households in india the robustness of the results with respect to functional form specification and credit constraints is examined the female intertemporal elasticity of substitution is found to be significant but low similar to estimates from the us elasticity estimates for males are negative or zero tests of symmetry and additive separability proved inconclusive as they are quite sensitive to functional form in addition the empirical analysis revealed significant differences in the elasticity of substitution of females depending on land ownership and whether the period of reference falls during planting and harvesting or after harvesting these differences suggest that credit constraints limit the possibilities of substitution of labor supply across time

pension coverage and borrowing constraints using data from the 1983 survey of consumer finances and taking a measure of borrowing constraint status as an indication of a worker s discount rate we find evidence that borrowing constrained workers are less likely to be covered by a pension plan and that the borrowing constraint effect is significant only for defined benefit plans this paper examines the extent to which differences in workers rates of time preferences can explain pension coverage outcomes we argue that workers with a high rate of time preference will avoid jobs with pensions because pension saving cannot be costlessly borrowed against and they will be more reluctant to join a defined benefit than a defined contribution plan because defined benefit plans offer less flexibility in choosing a pension saving rate the existing empirical literature on pension coverage emphasizes the role of taxes incentives administrative costs and employee perceptions of default and nonportability risks 1 this study concentrates on how the ability to borrow against pension contributions affects worker pension demand

foreign exchange rate expectations micro survey data this paper analyzes the panel data of biweekly surveys on the yen dollar exchange rate expectations of forty four institutions for two years and contains four major findings first market participants are heterogeneous that is significant individual effects exist in their expectation formation second the individual effects have a characteristic of wishful expectations exporters expect yen depreciation and importers expect yen appreciation relative to others third many violate the rational expectations hypothesis fourth forecasts with long horizons show less yen appreciation than those with short horizons cross equation constraints implied by the consistency of the forecast term structure are strongly rejected in the data copyright 1990 by american economic association

heterogeneous expectations and tests of efficiency in the yen dollar forward exchange rate market this paper examines the efficiency of the forward yen dollar market using micro survey data conventional tests of unbiasedness do not correspond directly to the zero profit condition instead we use the survey data to calculate potential profits of individual forecasters based on a natural trading rule we find that although the survey data are not the best predictor of future spot rates in terms of typical mean square forecast error criteria the survey data can be used to obtain on average positive profits however these profits are small and highly variable similar results are found when we examine profits generated by a trading rule using regression forecasts the profits are found to be correlated with risk type variables but not other available information

intertemporal substitution and constraints on labor supply evidence from panel data intertemporal substitution and constraints on labor supply evidence from panel data i introduction through much of the 1970s and 1980s macroeconomic stabilization analysis has been dominated by equilibrium models in which fluctuations in employment result from intertemporal substitution workers voluntarily vary their labor supply over time in response to movements in wages and interest rates a number of recent empirical tests of intertemporal substitution models for example altonji 1982 mankiw et al 1985 ham 1986 strongly reject the intertemporal substitution approach these results have led some economists to reject equilibrium macro models in favor of keynesian models in which workers face quantity constraints on labor supply in keynesian models employment fluctuations result from changes in the severity of constraints that is changes in involuntary unemployment rather than intertemporal substitution on the other hand many economists remain unconvinced by recent rejections of intertemporal substitution models because the results are consistent with many possible explanations for tractability empirical studies always impose restrictive assumptions such as separability of utility over time and between goods or such as the existence of a representative consumer data also suffer from numerous problems such as aggregation bias measurement error and the use of average rather than marginal wage rates consequently even the authors of the studies seem hesitant to draw firm conclusions they often simply conclude that workers behavior is explained either by quantity constraints or by a more complicated intertemporal substitution model than the one they have tested 1 this paper attempts to determine which of these explanations is correct are changes in employment a sophisticated form of intertemporal substitution or are they involuntary the crucial data come from questions in the panel study of income dynamics about whether workers experience unemployment or are unable to work as many hours as they want following ham 1982 1986 this information is used to classify workers as quantity constrained in their labor supply or unconstrained i then test a simple intertemporal substitution model for each group of workers if the tests suffer from overly restrictive utility functions or data problems then the model should be rejected for both samples on the other hand if some workers truly face quantity constraints then the model should perform better for the sample of unconstrained workers 2 the tests yield two main results first the model indeed performs worse for the constrained workers for this group the data reject the model s overidentifying restrictions and the parameter estimates contradict the model in contrast the results for the unconstrained workers are weakly consistent with the model as keynesian theories suggest quantity constraints alter workers behavior second the estimates of the intertemporal labor supply elasticity for prime age men are close to zero even for unconstrained workers even if workers are free to vary their hours they apparently choose to respond little to movements in wages the paper addresses two other issues first do constraints on borrowing influence labor supply in the intertemporal substitution model workers borrow and lend to smooth consumption while varying hours of work as this suggests the model performs best for workers who not only face no labor supply constraints but who also own substantial assets and thus are unlikely to face liquidity constraints finally the paper proposes a new approach to identifying intertemporal labor supply equations previous micro studies do not adequately address the problem that wages are correlated with unobservable characteristics that affect tastes for work i propose two identifying restrictions 1 changes in tastes are uncorrelated with levels of time in variant variables and 2 changes in tastes have no aggregate component

liquidity constraints with endogenous income i introduction the existence of liquidity constraints remains a significant issue within intertemporal models of household choice as hayashi 1985b cox and jappelli 1993 and other studies detail the notion that consumers may be unable to borrow all they desire to finance current consumption carries important implications pertaining to ricardian equivalence as well as the dynamic effects of government spending versus tax policies liquidity constraints have also been advanced as a primary reason for empirical rejections of the permanent income life cycle hypothesis as discussed in zeldes 1989 testing for the existence of debt constraints with micro data has generated mixed results 1 hall and mishkin 1982 mariger 1987 zeldes 1989 hayashi 1985a and duca and rosenthal 1994 argue for the significance of liquidity constraints jappelli 1990 and duca and rosenthal 1994 contend that a nontrivial segment of the population faces credit rationing based upon information from the survey of current finances on the other hand the findings of altonji and siow 1987 runkle 1991 mariger and shaw 1993 and attanasio and weber 1995 provide little evidence of liquidity constraints this article investigates liquidity constraints with endogenous income it centers around the household s intertemporal model with nonseparable consumption and leisure following the methodology of zeldes 1989 and runkle 1991 the formulation allows for an individual household at a point in time to either face binding or nonbinding liquidity constraints our model extends this work by considering labor supply within the family s choice set as recommended by hayashi 1985a and attanasio and weber 1995 it includes endogenous wage income in the minimum wealth constraint these features allow for consideration of work related decisions within household utility maximization under liquidity constraints for example a family may choose increased labor supply to remove themselves from a debt constraint or to enable them to apply for a larger loan this behavior may take the form of increased overtime finding a second job or having the spouse enter the labor market the model works toward remedying several difficulties associated with empirical testing for liquidity constraints following alessie melenberg and weber 1988 we derive from the euler equations an estimable equation for employed households the equation holds for both liquidity constrained families as well as households that do not face a binding debt constraint this result addresses a well known problem involved with the standard consumption based utility formulation as discussed by hayashi 1985b and others the inability to directly estimate the euler equation s for liquidity constrained households consequently work such as hayashi 1985a zeldes 1989 and runkle 1991 use an a priori criterion to split the sample into suspected liquidity constrained and non liquidity constrained groups their tests are based upon parameter estimates from the group not considered to be debt constrained given estimated structural parameters from the consumption leisure model we can obtain estimates related to the individual lagrange multipliers pertaining to the minimum wealth constraint these estimated data series enable us to test directly for the presence of credit constraints within the general population primarily due to the difficulty in estimating the lagrange multipliers indirect means have generally been used to test for debt constraints over a sample of households hall and mishkin 1982 base their inferences on the excess sensitivity of consumption forecast errors to income innovations mariger and shaw 1993 raise doubts regarding their findings showing that such tests of the permanent income life cycle hypothesis can be biased toward rejection zeldes 1989 and fissel and jappelli 1990 criticize the general method since it assumes a constant proportion of liquidity constrained households

unemployment and liquidity constraints summary we present a dynamic framework for the interaction between borrowing liquidity constraints and deviations of actual hours from desired hours both measured by discrete valued indicators and estimate it as a system of dynamic binary and ordered probit models with panel data from the panel study of income dynamics we analyze a household s propensity to be liquidity constrained by means of a dynamic binary probit model we analyze qualitative aspects of the conditions of employment namely whether the household head is involuntarily overemployed voluntarily employed or involuntarily underemployed or unemployed by means of a dynamic ordered probit model we focus on the possible interaction between the two types of constraints we estimate these models jointly using maximum simulated likelihood where we allow for individual random effects along with an autoregressive process for the general error term in each equation a novel feature of our method is that it allows for the random effects to be correlated with regressors in a time invariant fashion our results provide strong support for the basic theory of constrained behavior and the interaction between liquidity constraints and exogenous constraints on labor supply copyright 2007 john wiley sons ltd

is forward looking inflation targeting destabilizing the role of policy s response to current output under endogenous investment we show that with endogenous investment virtually all monetary policy rules that set a nominal interest rate in response solely to expected future inflation induce real indeterminacy in models with i staggered prices ii staggered prices and staggered wages and iii staggered prices staggered wages and firm specific capital in i policy s response to current output can help significantly in ensuring determinacy with an infinite labor supply elasticity but little with empirically plausible labor supply elasticity in ii responding to output always helps a great deal though under low price stickiness and without capital adjustment cost it may call for a moderate response to output in order to ensure determinacy for a wide range of response to inflation in iii even a tiny response to output can always render equilibrium determinate for a wide range of response to inflation

testing whether unemployment represents intertemporal labour supply behaviour 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 intertemporal labour 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

estimation of a labour supply model with censoring due to unemployment and underemployment this study proposes and implements a method of labour supply estimation which is appropriate when the sample contains unemployed and underemployed workers the estimation method consists of excluding unemployed and underemployed workers from the sample and then using to avoid selection bias an extension of heckman s approach to the case where two correlated selection rules generate the sample hausman s specification test is then used to determine whether ignoring constrained workers has led to biases in traditional labour supply estimates and the empirical results suggest that previous estimates of several important parameters are biased since the biases go in the direction that would be predicted by the hypothesis that the unemployed and underemployed are constrained the results support this hypothesis

the effects of hours constraints on labor supply estimates almost all labor supply models are estimated under the assumption that workers are free to choose their hours however theory casual empiricism and survey data suggest that many workers are not free to vary the hours within a job consequently labor supply estimates based on actual hours of work may be biased using canadian data on desired hours of work the authors find that using actual hours causes labor supply estimates to be biased upwards copyright 1991 by mit press