IMPLICIT CONTRACTS, LIFE CYCLE LABOR SUPPLY, AND INTERTEMPORAL SUBSTITUTION

Authors

  • JOHN C. HAM,

    1. University of Maryland, U.S.A. National University of Singapore, Singapore, IFAU, IFS, IRP (UW) and IZA, University of Leeds, U.K.
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  • KEVIN T. REILLY

    1. University of Maryland, U.S.A. National University of Singapore, Singapore, IFAU, IFS, IRP (UW) and IZA, University of Leeds, U.K.
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    • The Economic and Social Research Council Data Archive at the University of Essex provided us with a copy of the Panel Study of Income Dynamics. Eileen Kopchik and Xiaodong Liu provided excellent research assistance on the project. Comments by A. Brumwell, D. Benjamin, S. Imrohoroglu, R. Rogerson, Yuxin Su, K. Wolpin, and workshop participants at the 2003 Society of Labor Economists, the 2005 Southern California Applied Micro Conference, the University of Leicester, Universitat Pompeu Fabra, University College London, the University of Edinburgh, York University, and the New York Fed's brown bag lunch are gratefully acknowledged. We also thank three anonymous referees for their helpful comments. Some of this research was conducted while Ham was a visitor at the Federal Reserve Bank of New York and he thanks the Bank for providing a hospitable and productive environment. We are grateful for the research support from the NSF and the ESRC (RES-000-22-1765). Opinions, findings, conclusions, or recommendations in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation, the Economic and Social Science Research Council, the Federal Reserve Bank of New York, or the Federal Reserve System. We are responsible for any errors. Please address correspondence to: John Ham, 3105 Tydings Hall, College Park, Maryland 20742, USA. Phone: 301-405-3266. Fax: 301-405-5743. E-mail: john.ham.econ@gmail.com.


Abstract

The implicit contract model is a serious alternative to the spot market interpretation of the labor market. However, its usefulness has been limited because the wage is unobserved, and hence it has not been possible to estimate an intertemporal (Frisch) supply elasticity for the model using microdata. In this article, we show that one can estimate this elasticity from microdata within the context of the implicit contract model under relatively weak assumptions based on consumer theory. We implement our approach on two micro data sets and, for both, obtain a reasonably precise elasticity estimate of approximately 1.0.

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