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Demographic Change And The Great Moderation In An Overlapping Generations Model With Matching Frictions

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  • Lugauer, Steven

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.

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  • Lugauer, Steven, 2012. "Demographic Change And The Great Moderation In An Overlapping Generations Model With Matching Frictions," Macroeconomic Dynamics, Cambridge University Press, vol. 16(5), pages 706-731, November.
    • Handle: RePEc:cup:macdyn:v:16:y:2012:i:05:p:706-731_00
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    Cited by:

    1. Graham, James & Ozbilgin, Murat, 2021. "Age, industry, and unemployment risk during a pandemic lockdown," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    2. Mennuni, Alessandro, 2019. "The aggregate implications of changes in the labour force composition," European Economic Review, Elsevier, vol. 116(C), pages 83-106.
    3. Heer, Burkhard & Rohrbacher, Stefan & Scharrer, Christian, 2017. "Aging, The Great Moderation, And Business-Cycle Volatility In A Life-Cycle Model," Macroeconomic Dynamics, Cambridge University Press, vol. 21(2), pages 362-383, March.
    4. Insook Lee, 2020. "Trade-Off Effect of Pay-As-You-Go Public Pension on Economic and Welfare Volatility," Hacienda Pública Española / Review of Public Economics, IEF, vol. 233(2), pages 117-140, June.
    5. Mario Holzner & Stefan Jestl & David Pichler, 2022. "Public and private pension systems and macroeconomic volatility in OECD countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(2), pages 131-168, May.
    6. Steven Lugauer, 2012. "Estimating the Effect of the Age Distribution on Cyclical Output Volatility Across the United States," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 896-902, November.
    7. Tselmuun Tserenkhuu & Stephen Kosempel, 2024. "Life expectancy and business cycles in a small open economy," ISER Discussion Paper 1263, Institute of Social and Economic Research, Osaka University.
    8. Katerina Koka, 2015. "The Impact of the Population Age Structure on the Response to Negative Asset Shocks," Economics Bulletin, AccessEcon, vol. 35(4), pages 2270-2281.
    9. 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.
    10. Steven Lugauer, 2012. "The Supply of Skills in the Labor Force and Aggregate Output Volatility," Working Papers 005, University of Notre Dame, Department of Economics, revised Jun 2012.
    11. Lugauer, Steven & Redmond, Michael, 2012. "The age distribution and business cycle volatility: International evidence," Economics Letters, Elsevier, vol. 117(3), pages 694-696.

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