Hostname: page-component-cd9895bd7-8ctnn Total loading time: 0 Render date: 2024-12-23T05:28:15.207Z Has data issue: false hasContentIssue false
  • English
  • Français

DEMOGRAPHIC CHANGE AND THE GREAT MODERATION IN AN OVERLAPPING GENERATIONS MODEL WITH MATCHING FRICTIONS

Published online by Cambridge University Press:  30 December 2011

Steven Lugauer
Steven Lugauer*
Affiliation:
University of Notre Dame
*
Address correspondence to: Steven Lugauer, Department of Economics, University of Notre Dame, 719 Flanner Hall, Notre Dame, IN 46556, USA, e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

The fraction of the labor force under 35, or youth share, has been correlated with cyclical GDP volatility over the past several decades. The youth share and business cycle fluctuations were high during the 1970s. Then, as the population aged, output volatility declined. I develop an overlapping generations model featuring search frictions and productivity shocks, in which the age distribution affects cyclical volatility through two channels. First, employment for younger workers fluctuates more, creating a composition effect. Second, inexperienced workers produce less, so firms decide how many jobs to create based on the age distribution. Both this endogenous response by firms and the composition effect increase aggregate volatility when the youth share is high. The model can replicate a large portion of the Great Moderation in GDP volatility, suggesting an important role for demographics. The model also replicates unemployment rates, separation rates, and employment volatility by age group.

Keywords

Business CyclesDemographicsOverlapping GenerationsJob Search
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 5 , November 2012 , pp. 706 - 731
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Acemoglu, D. (1999) Changes in unemployment and wage inequality: An alternative theory and some evidence. American Economic Review 89, 1259–1278.CrossRefGoogle Scholar
Altonji, J.G. and Williams, N. (1998) The effects of labor market experience, job seniority, and job mobility on wage growth. Research in Labor Economics 17, 233–276.Google Scholar
Andolfatto, D. (1996) Business cycles and labor-market search. American Economic Review 86 (1), 112–132.Google Scholar
Cahuc, P., Postel-Vinay, F., and Robin, J.-M. (2006) Wage bargaining with on-the-job search: Theory and evidence. Econometrica 74 (2), 323–364.CrossRefGoogle Scholar
Clark, K.B. and Summers, L.H. (1981) Demographic differences in cyclical employment variation. Journal of Human Resources 16, 61–79.CrossRefGoogle Scholar
Davis, S.J. and Kahn, J.A. (2008) Interpreting the great moderation: Changes in the volatility of economic activity at the macro and micro levels. Journal of Economic Perspectives 22 (4), 155–180.CrossRefGoogle Scholar
Elsby, M.W.L., Michaels, R., and Solon, G. (2009) The ins and outs of cyclical unemployment. American Economic Journal: Macroeconomics 1 (1), 84–110.Google Scholar
Fujita, S. and Ramey, G. (2009) The cyclicality of separation and job finding rates. International Economic Review 50 (2), 415–430.CrossRefGoogle Scholar
Gomme, P., Rogerson, R., Rupert, P., and Wright, R. (2004) The business cycle and the life cycle. NBER Macro Annual 19, 415–461.CrossRefGoogle Scholar
Hall, R.E. (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95 (1), 50–65.CrossRefGoogle Scholar
Hall, R.E. and Milgrom, P.R. (2008) The limited influence of unemployment on the wage bargain. American Economic Review 98 (4), 1653–1674.CrossRefGoogle Scholar
Herrera, A.M. and Pesavento, E. (2009) Oil price shocks, systematic monetary policy, and the “Great Moderation.” Macroeconomic Dynamics 13, 107–137.CrossRefGoogle Scholar
Jaimovich, N., Pruitt, S., and Siu, H. (2010) The Demand for Youth: Implications for the Hours Volatility Puzzle. Working paper, University of British Columbia.CrossRefGoogle Scholar
Jaimovich, N. and Siu, H.E. (2009) The young, the old, and the restless: Demographics and business cycle volatility. American Economic Review 99 (3), 804–826.CrossRefGoogle Scholar
Kydland, F.E. and Prescott, E.C. (1982) Time to build and aggregate fluctuations. Econometrica 50, 1345–1370.CrossRefGoogle Scholar
Lugauer, S. (2010) Estimating the effect of the Age Distribution on Cyclical Output Volatility across the United States. Working paper, University of Notre Dame.Google Scholar
Mortensen, D.T. and Pissarides, C.A. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61 (3), 397–415.CrossRefGoogle Scholar
Nagypál, É. (2004) Worker Reallocation over the Business Cycle: The Importance of Job-to-Job Transitions. Working paper, Northwestern University.Google Scholar
Nagypál, É. (2006) Amplification of productivity shocks: Why don't vacancies like to hire the unemployed?In Structural Models of Wage and Employment Dynamics, Contributions to Economic Analysis, vol. 275. pp. 481–506. Amsterdam: Elsevier.CrossRefGoogle Scholar
Pries, M. and Rogerson, R. (2005) Hiring policies, labor market institutions, and labor market flows. Journal of Political Economy 113 (4), 811–839.CrossRefGoogle Scholar
Pries, M.J. (2004) Persistence of employment fluctuations: A model of recurring job loss. Review of Economic Studies 71, 193–215.CrossRefGoogle Scholar
Rios-Rull, J.-V. (1996) Life-cycle economies and aggregate fluctuations. Review of Economic Studies 63, 465–489.CrossRefGoogle Scholar
Shimer, R. (2001) The impact of young workers on the aggregate labor market. Quarterly Journal of Economics 116 (3), 969–1007.CrossRefGoogle Scholar
Shimer, R. (2005) The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review 95 (1), 25–49.CrossRefGoogle Scholar
Stock, J.H. and Watson, M. W. (2002) Has the business cycle changed and why? NBER Macroeconomics Annual 159–218.CrossRefGoogle Scholar
Tasci, M. (2006) On-the-Job Search and Labor Market Reallocation. Working paper, University of Texas at Austin.CrossRefGoogle Scholar