UNEMPLOYMENT AND REAL WAGE SPECULATION: EMPIRICAL TESTS FOR GREAT BRITAIN 1967–1980
| Published date | 01 June 1983 |
| Author | S. P. Hannah |
| DOI | http://doi.org/10.1111/j.1467-9485.1983.tb01007.x |
| Date | 01 June 1983 |
Srorruhlournulof
Poliricd
Economy.
Vol.
30,
No.
2,
June
1983
0
1983
Scottish
Economic
Society
UNEMPLOYMENT AND REAL WAGE
SPECULATION
:
EMPIRICAL TESTS FOR GREAT BRITAIN
S.
P.
HANNAH*
University
of
Keele
1967-1980
I
INTRODUCTION
This article contains empirical tests of the Lucas-Rapping labour supply
hypothesis in the context of rational expectations and incomplete information.
These tests are based on data
for
Great Britain during the period 1967-80 and
build on the preliminary work of Altonji and Ashenfelter (1980).
The theoretical model to be tested is outlined in Section 11. Lucas and
Rapping (1970) see measured unemployment as
a
voluntary labour supply
phenomenon which is determined by workers’ real wage speculative activity.
This model, sometimes termed the Intertemporal Substitution Hypothesis,
typifies the approach taken by New Classical Macroeconomics.
It emphasises voluntary rather than involuntary unemployment, it assumes
continuous equilibrium in labour and goods markets and excludes the
possibility of demand-constrained equilibria and inefficient markets. With
workers forming their wage expectations rationally then Government
attempts to “fine-tune” unemployment through conventional demand-
management techniques may well be ineffective and undesirable (even
if
there
is only limited wage information available).
The substantial rises in unemployment in 1975 and again in 1980 are
a
strong challenge to the explanatory power of the Intertemporal Substitution
Hypothesis and therefore of an important component of New Classical
Macroeconomics. The empirical tests in Section I11 are thus a timely
examination of the relevance of supply-based explanations
of
the current
unemployment “crisis”.
I1
INTERTEMPORAL SUBSTITUTION, RATIONAL EXPECTATIONS
AND
UNEMPLOYMENT
7he Lucas-Rapping labour supply function
The starting point for the Lucas-Rapping labour supply function is a single
household which maximises utility in competitive goods and labour markets.
*The author gratefully acknowledges the
support
of
an
SSRC
project grant and the research
assistance provided by Tim Robinson.
Date
of
receipt
of
final manuscript
:
31
August
1982.
128
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