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Business Cycles and Household Formation

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  • Greg Kaplan

    (Princeton University)

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.

Suggested Citation

  • Greg Kaplan, 2014. "Business Cycles and Household Formation," 2014 Meeting Papers 82, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:82
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    References listed on IDEAS

    as
    1. Nir Jaimovich & Henry E. Siu, 2009. "The Young, the Old, and the Restless: Demographics and Business Cycle Volatility," American Economic Review, American Economic Association, vol. 99(3), pages 804-826, June.
    2. Edward C. Prescott, 2006. "The Transformation of Macroeconomic Policy and Research," The American Economist, Sage Publications, vol. 50(1), pages 3-20, March.
    3. 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.
    4. Greg Kaplan, 2012. "Moving Back Home: Insurance against Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 446-512.
    5. 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.
    6. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2010. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Journal of Political Economy, University of Chicago Press, vol. 118(4), pages 681-722, August.
    7. Paul Gomme & Richard Rogerson & Peter Rupert & Randall Wright, 2005. "The Business Cycle and the Life Cycle," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 415-592, National Bureau of Economic Research, Inc.
    8. Nir Jaimovich & Seth Pruitt & Henry E. Siu, 2009. "The Demand for Youth: Implications for the Hours Volatility Puzzle," NBER Working Papers 14697, National Bureau of Economic Research, Inc.
    9. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January.
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    Cited by:

    1. Marianne Bitler & Hilary Hoynes, 2015. "Living Arrangements, Doubling Up, and the Great Recession: Was This Time Different?," American Economic Review, American Economic Association, vol. 105(5), pages 166-170, May.

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