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

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

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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File URL: http://www.nber.org/papers/w17880.pdf
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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
Date of revision:
Handle: RePEc:nbr:nberwo:17880
Note: EFG LS
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  1. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers gueconwpa~03-03-19, Georgetown University, Department of Economics.
  2. Kim B. Clark & Lawrence H. Summers, 1980. "Demographic Differences in Cyclical Employment Variation," NBER Working Papers 0514, National Bureau of Economic Research, Inc.
  3. Nir Jaimovich & Seth Pruitt & Henry E. Siu, 2009. "The demand for youth: implications for the hours volatility puzzle," International Finance Discussion Papers 964, Board of Governors of the Federal Reserve System (U.S.).
  4. Nir Jaimovich & Henry E. Siu, 2007. "The young, the old, and the restless: demographics and business cycle volatility," Staff Report 387, Federal Reserve Bank of Minneapolis.
  5. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," American Economic Review, American Economic Association, vol. 101(3), pages 471-75, May.
  6. Edward C. Prescott, 2006. "Nobel Lecture: The Transformation of Macroeconomic Policy and Research," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 203-235, April.
  7. Greg Kaplan, 2010. "Moving back home: insurance against labor market risk," Working Papers 677, Federal Reserve Bank of Minneapolis.
  8. Paul Gomme & Richard Rogerson & Peter Rupert & Randall Wright, 2004. "The business cycle and the life cycle," Working Paper 0404, Federal Reserve Bank of Cleveland.
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