On the Interpretation of Unemployment in Empirical Labour Supply Analysis

Abstract

The purpose of this paper is to summarize a certain line of work on the interpretation of unemployment in the analysis of male labour supply behavior. Specifically, this work investigates whether the data support the null hypothesis that individuals experiencing unemployment are on a labour supply function, and if the data do not support this hypothesis, how might a researcher proceed in empirical work. The motivation for doing this is two fold. First, what unemployment represents is an intrinsically interesting question, and may have implications beyond labour supply analysis in terms of macroeconomic theory. Second, if unemployed workers are constrained in the sense that they are off their individual labour supply functions, standard labour supply estimation may involve a fundamental misspecification of the equation. However, it should be emphasized that the purpose of this paper is to survey one possible approach to this problem; the paper does not attempt to provide a general survey on labour supply estimation or on constraints in the labour market.