Intertemporal substitution for consumption and leisure: empirical evidence for Spain

In this paper we test the three first-order conditions of an intertemporal optimization model for a representative individual who chooses simultaneously for her level of consumption and leisure, assuming a separable utility function. We estimate these first order conditions separately and jointly using a Spanish pseudo-panel data set built by combining the Family Expenditure Survey and the Labour Survey for Spain over the period 1987-1997. Our results confirm previous empirical evidence as regards the elasticity of intertemporal substitution for consumption, that we estimate around 0.4/0.5, and provide an estimate for the leisure intertemporal elasticity around 0.2/0.3. Finally, we provide further evidence controlling for human capital. This allows checking that the model ignoring human capital produces biased estimates for the elasticity of intertemporal substitution for leisure.