Determination of Employment with Wage and Price Speculation

The purpose of this paper is to investigate whether aggregate fluctuations in employment may be explained within a market-clearing framework as intertemporal substitution in labor supply and demand. An intertemporal substitution model for the firm is derived; this model is estimated with a Lucas-Rapping-type supply equation. Empirical results with Finnish data lend support to the intertemporal substitution model, particularly concerning the demand function specification. On the other hand, the results for the supply equation are somewhat mixed, being rather sensitive to the dynamic specification.