An Econometric Analysis of Fluctuations in Aggregate Labor Supply and Demand.

This paper contains an equilibrium model of the labor market. The supply function allows f or temporal substitution in response to wage fluctuations, and the de mand function allows for adjustment costs. Two related issues are emp hasized: identification of supply and demand functions, and sources o f serial correlation in employment and real wages. When the supply an d demand shocks are AR(1) processes, the equilibrium process for empl oyment and real wages is a restricted VAR(2). The supply and demand f unctions are (locally) identified using only employment and real wage data. An illustrative application is presented, using U.S. data for 1948-71. Copyright 1988 by The Econometric Society.