Bayesian analysis of a dynamic stochastic model of labor supply and saving

This paper empirically implements a dynamic, stochastic model of life-cycle labor supply and human capital investment. The model allows agents to be forward looking. But, in contrast to prior literature in this area, it does not require that expectations be formed “rationally.” By avoiding strong assumptions about the way people form expectations I avoid sources of bias stemming from misspecification of the expectation process. The analysis focuses on the age-hours profile of young men and uses data drawn from the National Longitudinal Survey of Youth. An econometric method suggested by Geweke and Keane (1999) is used to relax assumptions over expectations. The results of this study are consistent with previous results reported in the human capital and labor supply literature. In particular, I find no evidence that the rational expectations assumption has distorted our understanding of the labor supply process of young men.