Losers Amongst the Losers: The Welfare Effects of the Great Recession Across Cohorts

Abstract

This paper studies the effect of deep recessions on intergenerational inequality by quantifying the welfare effects on households at different phases of the life cycle. Deep recessionary episodes are characterized by large declines in the prices of real and financial assets and in employment. The former levies high welfare costs on older households who own financial wealth, the latter determines labour income losses and destroys the human capital of younger cohorts, lowering their productivity. The paper extends previous analyses in the literature by including permanent labour income losses in an OLG model calibrated to match the Great Recession. The analysis shows that younger households lose more than double of all other living cohorts, as younger household become unemployed and experience a decline in their future income. The dynamics of households’ consumption and portfolio composition between 2007 and 2013 in the US are consistent with the predictions of the model. JEL Classification: E21, D31, D58, D63, D91