Is There Chronic Excess Supply of Labor? Designing a Statistical Test

In this paper we present and implement a statistical test of the hypothesis that the labor market has chronic excess supply. The procedure is to estimate a disequilibrium labor market model, and construct a test statistic based on the unconditional probability that there is excess supply each period. We find that the data reject the hypothesis of chronic excess supply. Hence, one cannot assume that all observations lie on the demand curve.