Testing Whether Unemployment Represents Intertemporal Labor Supply Behavior

Abstract

This study proposes and implements a specification test for the hypothesis that unemployment represents intertemporal labour supply behavior. The test allows for uncertainty and endogenous unemployment. Given standard specifications of the intertemporal labour supply model, I find strong evidence against this interpretation of unemployment. These results indicate the need to turn to either 1) alternative models where unemployed workers are off a supply function or ii) more complex models of intertemporal substitution.