Aging, The Great Moderation, And Business-Cycle Volatility In A Life-Cycle Model

According to empirical studies, the life cycle of labor supply volatility exhibits a U-shaped pattern. This may lead to the conclusion that demographic change induces a drop in output volatility. We present an overlapping-generations model that replicates the empirically observed pattern and study the impact of demographic transition on output volatility. We find that the change in age composition itself has only a marginal influence on output volatility, as the mitigating effect of more individuals with lower labor supply volatilities is compensated for by higher age-specific labor shares. Instead, the driving force behind the Great Moderation in our model is the downward shift of the age-specific labor supply volatility curve.