The Business Cycle and the Life Cycle

Abstract

Our paper documents the differences in the variability of hours worked over the business cycle across several demographic groups and shows that these differences are large. We argue that understanding these differences should be useful in understanding the forces that account for aggregate fluctuations in hours worked. In particular, it is well known that standard models of the business cycle driven by technology shocks do not account for all of the variability in hours of work. This raises the following question: To what extent can the forces in this model account for the differences across demographic groups? We explore this in the context of hours fluctuations by age groups by formulating and analyzing a stochastic overlapping generations model. Our analysis shows that the model does a good job of accounting for hours fluctuations for prime-age workers but not for young or old workers. We conclude that a key issue is to understand why fluctuations for young and old workers are so much larger.