DP23 Rational Expectations and Labour Market Equilibrium in Britain 1855-1913

Author(s): Timothy J. Hatton
Publication Date: July 1984
Keyword(s): Britain, Labour Markets, Phillips Curve, Rational Expectations
JEL(s): 820
Programme Areas: Human Resources
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=23

This paper tests a two equation model of supply and demand for labour for 1857-1913, the period which was the focus of the original Phillips curve study. The basic structure is an equilibrium model of the labour market with "classical" characteristics arising from a surprise supply function and the assumption that expectations are formed rationally i. e. in a way consistent with the model itself. Tests of exclusion restrictions on a general reduced form tend to weakly reject these joint hypotheses. Tests on a structural model reject unanticipated wage change in a favour of actual wage change as the appropriate variable in the supply function. This gives support to the original Phillips curve formulation.