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.