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Business Cycles and Household Formation: The Micro vs the Macro Labor Elasticity

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  • Sebastian Dyrda
  • Greg Kaplan
  • José-Víctor Ríos-Rull

Abstract

We provide new evidence on the the cyclical behavior of household size in the United States from 1979 to 2010. During economic downturns, people live in larger households. This is mostly, but not entirely, driven by young people moving into or delaying departure from the parental home. We assess the importance of these cyclical movements for aggregate labor supply by building a model of endogenous household formation within a real business cycle structure. We use the model to measure how much more volatile are hours due to two mechanisms: (i) the presence of a large group of mostly young individuals with non-traditional living arrangements; and (ii) the possibility for these individuals to change their living situation in response to aggregate conditions. Our exercise assumes that older people living in stable households have a Frisch elasticity that is consistent with the micro evidence that is based on such people. The inclusion of people living in unstable households yields an implied aggregate, or macro, Frisch elasticity that is around 45% larger than the assumed micro elasticity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17880.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17880

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  1. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers, Georgetown University, Department of Economics gueconwpa~03-03-19, Georgetown University, Department of Economics.
  2. Greg Kaplan, 2010. "Moving back home: insurance against labor market risk," Staff Report, Federal Reserve Bank of Minneapolis 449, Federal Reserve Bank of Minneapolis.
  3. Nir Jaimovich & Henry E. Siu, 2009. "The Young, the Old, and the Restless: Demographics and Business Cycle Volatility," American Economic Review, American Economic Association, American Economic Association, vol. 99(3), pages 804-26, June.
  4. Nir Jaimovich & Seth Pruitt & Henry E. Siu, 2009. "The demand for youth: implications for the hours volatility puzzle," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 964, Board of Governors of the Federal Reserve System (U.S.).
  5. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(2), pages 203-235, April.
  6. Kim B. Clark & Lawrence H. Summers, 1981. "Demographic Differences in Cyclical Employment Variation," Journal of Human Resources, University of Wisconsin Press, vol. 16(1), pages 61-79.
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Cited by:
  1. Ríos-Rull, José-Víctor & Schorfheide, Frank & Fuentes-Albero, Cristina & Kryshko, Maxym & Santaeulàlia-Llopis, Raül, 2012. "Methods versus substance: Measuring the effects of technology shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(8), pages 826-846.
  2. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2013. "Does Indivisible Labor Explain the Difference between Micro and Macro Elasticities? A Meta-Analysis of Extensive Margin Elasticities," NBER Macroeconomics Annual, University of Chicago Press, University of Chicago Press, vol. 27(1), pages 1 - 56.
  3. Francesco Furlanetto & Gisle J. Natvik & Martin Seneca, 2011. "Investment shocks and macroeconomic co-movement," Working Paper, Norges Bank 2011/14, Norges Bank.
  4. Effrosyni Adamopoulou & Ezgi Kaya, 2013. "Young adults living with their parents and the influence of peers," Economics Working Papers we1310, Universidad Carlos III, Departamento de Economía.
  5. Andrew D. Paciorek, 2013. "The long and the short of household formation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-26, Board of Governors of the Federal Reserve System (U.S.).
  6. William B. Peterman, 2012. "Reconciling micro and macro estimates of the Frisch labor supply elasticity," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-75, Board of Governors of the Federal Reserve System (U.S.).
  7. Marios Karabarbounis, 2013. "Heterogeneity in labor supply elasticity and optimal taxation," Working Paper, Federal Reserve Bank of Richmond 13-13, Federal Reserve Bank of Richmond.
  8. Sebastian Dyrda & Jose-Victor Rios-Rull, 2012. "Models of government expenditure multipliers," Economic Policy Paper, Federal Reserve Bank of Minneapolis 12-2, Federal Reserve Bank of Minneapolis.
  9. Haddow, Abigail & Mileva, Mariya, 2013. "Financial factors and the international transmission mechanism," Bank of England working papers 479, Bank of England.
  10. Mennuni, Alessandro, 2013. "Labor Force Composition and Aggregate Fluctuations," Discussion Paper Series In Economics And Econometrics 1302, Economics Division, School of Social Sciences, University of Southampton.

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