final lit review

Topics: Supply and demand, Economics, Monetary policy Pages: 10 (2019 words) Published: November 8, 2014


Labor Supply and Aggregate Fluctuation in Jamaica
Jordon Barrett 1104019
Renardo Peddie 1103867
Sacha Edwards 1106491
University of Technology, Jamaica

Introduction

Issues of labor supply are at the heart of macroeconomic explanations of the large cyclical fluctuation of output observed in modern economies. The intertemporal substitution model set to examine the view that labor market is always in balance; that every observed combination of employment and compensation is a point of intersection of the relevant supply and demand curve (Alexopolus, 2004). The title of the research is the labor supply and aggregate fluctuation in Jamaica. The thesis of this paper is to test the impact of the intertemporal substitution model on labor supply and aggregate fluctuation in Jamaica. The purpose is to test how the intertemporal substitution affects various factors that contribute to a change in labor supply and aggregate fluctuation in Jamaica. How do intertemporal substitution impact on workers and their willingness to vary their hours from one year to another?

The intertemporal substitution model is a model which states that labor supply responds positively to transitory increases in real wages and real interest rates. The main focus is on the intertemporal substitution model and how it is used to explain aggregate fluctuations. Economists have devoted substantial resources in estimating the intertemporal substitution elasticity for labor supply because this elasticity plays a crucial role in the real business cycle literature. Lucas and Rapping (1969) modeled unemployment as a choice variable. An individual is always on his (elastic) intertemporal labor supply function and can work as much as he wants given current and future wages. Heckman (1993) stated in his equilibrium search model that shocks are explicitly incorporated into wages and provide the worker with sufficient information to make decisions on current and future labor supply. He believed individuals have preferences over present and future work and present and future consumptions of goods, due to endowment of time available in the present and future, and the movement of resources from present to future or the reverse through borrowing or lending at a given interest rate. The intertemporal substitution model of fluctuation shows that workers are willing to shift their hours of work from one year to another in response to modest shifts in relative wages, with an elasticity of around one half MaCurdy (1978). He also completed a study of the evidence in the panel study of Income Dynamics for adult men. In addition he assumes that workers’ perception of lifetime well-being do not change from year to year, but rather can be treated as unobserved permanent individual characteristics. The observed response of hours to changes in wages is interpreted as pure substitution effect. He further estimated elasticity directly by regressing the log of hours of work on the log of the wage, the resulting elasticity’s range from 0.09 to 0.23. This research tends to confirm the general view that adult males do not vary their hours of work in a way that is sensitive to wages. A similar study carried out by Card (1994) for adult women found that women are much more sensitive to changes in wages. For women whose wages are beyond the minimum price that draws them into the labor market. The estimated elasticity of hours of work with respect to the wage is 6.6. There are no studies of intertemporal labor supply among teenagers, however it is assumed to be similar to adult women. (Hall, 1975; Altonji, 1986) took aim to highlight errors in Lucas and Rapping’s model and the large role it assigns to errors in perceiving the current real wage. The source of these errors, stem from the claim that the intertemporal substitution model makes all movements in employment and unemployment voluntary. Furthermore the most serious misunderstanding of the substitution...
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