Labor Supply Adjustment over the Business Cycle

This study extends one by Kalachek, Raines, and Larson (in the April 1979 Review) of the speed with which labor supply adjusts to changes in demand. The present study uses data from the Panel Study of Income Dynamics that permit a more precise appraisal of whether the speed of supply response varies over the business cycle. Analysis of data for the period 1972–76, during which a severe recession occurred, shows, as predicted, that as unemployment increases workers are less able to adjust their hours of work in response to changes in their health, wages, and other factors that determine desired work levels. The author also finds, however, that the more rapid response of supply in the recovery phase makes peak-to-peak adjustment relatively complete.