AGGREGATE LABOR

MARKET BEHAVIOR
A Critical Analysis of Study by Robert E. Hall (Stanford
University & National Bureau of Economic Research)

ABC XYZ
9/23/2014




Introduction
This paper entails a critical analysis of study made by Robert E. Hall (Stanford University &
National Bureau of Economic Research) about the Labor Supply and Aggregate Fluctuations.
(Hall, R. E. (1980).
Hypothesis
Author used Intertempora1 Substitution Hypothesis for the study purpose. The key question and
problem around which the study circulates is statement that the all practical arrangement of
employment and payment is a point of connection of the supply & demand curves teaches that the
employment market at all times remains in equilibrium. According to the Intertemporal
Substitution Model, labor work harder in some period comparatively because in that periods
market rewards are curiously higher than the slump periods. Workers are not strategically trapped
into additional work in a boom period but because they discover the work attractive because the rewards
are uncommonly high. Slumps are only phases when less effort is reasonably competent. Study base on
some key misunderstandings about the intertemporal substitution hypothesis and the
explanations about those misunderstandings in order to provide a best possible view of the
hypothesis. Author tries to provide a simple practical version of the intertemporal substitution
model for estimation of its key parameters in order to inquire whether the hypothesis used by the
model about aggregate fluctuations provides logic in inspection of other facts about intertemporal
substitution. Author also gives emphasis on the key implication of the model that the change in
the money supply is irrelevant to the change in the labor supply function. According to model,
markets should immediately have to comply with the full economic neutrality. The gathered data
explicitly prove this implication false. The money market unequivocally alters the labor supply function.
The pure substitution model appears indefensible in the beam of this data. Author also focus on the view
about the labor supply that in short run labor supply is principally extraneous for the purpose of aggregate
employment.
Methodology
Methodology used by author for his research paper is based on theoretical analysis of literature
and case studies in order to understand the effects of economic fluctuations within the labor
market. Thorough study of the literature about the Intertempora1 Substitution Hypothesis is
made for the estimation of its key parameters, and practical observations are done and evidences
are collected to support or deny the facts of the model. A review of macroeconomic theory of
intertemporal labor supply as it is developed in several places in order to understand the
phenomenon of availability of time to individuals in present and future and how this time is
valued by wages rate. Findings are driven through using equations about present and future
consumption of goods, real interest rates, work, real wages, and real assets. Mutual movements
of the relevant variables had been analyzed under the intertemporal substitution model and some
realistic weaknesses have been found by the author. Concept of combined fluctuations
encompasses big movements in work and slight movements in the substitution variable has been
examined to find how elastic the labor supply curve inherent in the collective data. Studies of
Thomas MaCurdy (1978) for Panel Study of Income Dynamics for adult men and James
Heckman & MaCurdy (1977) for Income Dynamics for adult women have also been taken in
account. The fact that is described by Intertemporal Substitution model about the irrelevancy or
no role of money in labor supply is also taken into consideration. Author also test the concept of
the substitution model about the availability of the mechanism through which money stock can
change the supply curve and find very different results. Robert Lucas (1972) and Barro &
Fischer (1976) studies about the non-neutrality of money also taken into consideration and
challenged based on different facts.
Findings
Research found one potential weakness of the intertemporal substitution model i.e. collective
fluctuations encompass big movements in employment as compared to substitution variables. He
present the econometric evidence on the aggregate movements of the relevant variables as well
as the microeconomic evidence on the elasticity of the labor supply. In order to find out how
elastic the labor supply is, graphs between the employment and substitution variables is taken
under consideration. For this purpose U.S. economy is taken under consideration and the
research found that the real soldierly overheads can rationally be taken as one of the major
external effects on the demand for productivity in the U.S. economy, and ultimately effect on the
consequent demand for labor. Arithmetical proof demonstrates that military expenses impulse
the US economy along upward-sloping labor supply and elasticity of labor supply approx. half.
Research found the great changings in real military expenditures resulted in the sufficiently small
slope of the labor supply function. Elasticity of labor supply is also analysed through
microeconomic data and research found that the deviation in the labor supply with respect to the
deviation in earnings is less balanced as compared to the econometric evidences gathered during
the research. Small changes in the interest rates and the big variations wages rates have been
found. For this analysis, evidences are gathered from surveys of individual workers and several
negative income tax experiments. Study of James Hackman and MaCurdy (1977) and Thomas
MaCurdy (1978) helps in finding out the collective wage elasticity of labor supply is around 2
but this fact is base only on the data of women and teenagers. Numerous negative income tax
experiments has also been done during the research among which one is three year period of
increased income along with the tax of 50%. Finding suggests that the earning elasticity for men
is about 0.26 whereas for women it is 0.66. With regards to the collective labor supply, the
negative income tax experiments proposes an overall income elasticity of .0.40. In order to find
the irrelevance of the money, author did some re-estimation about the labor supply equation with
the addition of the log of money supply. Statistics have shown an irresistible findings that money
can dramatically shifts the labor supply function. Therefore, research concluded that the neutral
response of money with regard to the changes in the labor supply is not a reasonable assumption
with respect to the US economy. Author also challenge the various theories about the labor
supply that the labor supply over reacts with regards to the nominal disturbance and under reacts
with regards to the real disturbance. Author suggests US economy as a proof i.e. workers of US
economy believed that they never get huge adequate movements in the actual wages for them so
that they make enough big adjustments in their working hours. Author also criticize that the
limited information is available in the modern US economy to reliably measure the changes in
labor supply due to the change in earning pattern. Author also highlighted the fact of
unemployment factor i.e. impact of unemployment on the economy. Almost all theories suggests
that the recession is a period when workers found that the lower level of work is enough and
appropriate then why recession is always escorted by a prominence in a figure of individuals
who are watching for job. Author finds the unemployment during a recession period as one of
the factor why the slumps periods resulted in a lower level of work by workers.
Relevance to Economics 316
This paper gives thoughtful and knowledgeable insights in understanding the results of economic
variations within the labor market but remain questionable in answering the fundamental
problem. The main focus of the paper was theory of intertemporal substitution which said that
the employment can alter even in a perfect economy i.e. there is not certainly an expected level
of employment. This research gives good understanding of US economy in order to understand
the causes of variation in the labor supply and employment level. Findings of the research is in
strong contradiction with the monetary neutrality concept with regard to the labor supply. Paper
finds the inadequacy of the pure substitution hypothesis. Text book economics 316 also gives
thorough understanding of monetary neutrality concept and the substitution model. Based on the
knowledge provided in economics 316, study of this paper gives the same understanding that the
text book provides along with some thoughtful insights about the weaknesses in these theories.
Author successfully highlight the weaknesses in the substitution model and based his finding on
the proofs gathered during the research. But author only gather data based on US economy
results in the ignorance of the rest of economies. One weakness of the research is that data
should be gathered and analysed atleast by two or three different economies so that the facts can
be analysed in much better way and the results would be more trustworthy.

Reference
Hall, R. E. (1980). Labor supply and aggregate fluctuations. Carnegie-Rochester Conference
Series on Public Policy.