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Blame it on the young
Nir Jaimovich and Henry Siu write:
We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding timing and nature differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for approximately one-fifth to one-third of this moderation.
That's in the June 2009 American Economic Review (somewhat different version). One ungated earlier version is here. A later NBER version is here. The very useful PowerPoints are here.
Posted by Tyler Cowen on July 4, 2009 at 11:07 AM in Economics | Permalink
Comments
Cool! Here's more discussion on the influence of demographic changes on U.S. inflation and deflation, and here's a tool you can use to project the demographic component of inflation, both of which have been popular with the BLS.
Posted by: Ironman at Jul 4, 2009 1:00:38 PM
I'm having a hard time getting a handle on what "business cycle volatility" really is or means.
Are shorter business cycles more volatile, or are long cycles with deep variation more volatile. If the business cycle of the 21st century is a long slow general trend downward with an even steeper decline currently underway followed by a long slow recovery over a decade or two less volatile then the 50s-60s-70s. If so, don't we want more volatility because incomes and such improve more in volatile economies?
But more generally, I thought the consensus was the lower volatility was because of the steady as she goes monetary policy. Is the data suggesting that the monetary policy is driven by the demographics?
I am very much interested in the demographic study the authors are doing; I have been trying to understand the implications of demographics on what is required for economic growth.
In particular, if as people have argued, we should be working long beyond age 65, an age set when people started dying quickly or otherwise were forced out of the labor force, then what are the people age 65 to 75 or beyond going to be doing for work in the economy. If retirement benefits are delayed from 65 to 70, then who is going to employ those age 65 to 70 and provide them with health benefits if Social Security and Medicare don't?
Yeah, I see the stories that say that employers need to keep the older workers around because of the shortage of younger workers as the relative birth dearth wave flows into the economy. But for the entire 21st century so far, employment as a share of population has been falling, and the group that has taken the biggest hit are the workers over age 50 who have worked in the more manual labor forces, not really unskilled, but the sectors in decline, manufacturing and construction trades (machinists, welders, foundry workers, manufacturing, bricklayer, etc.) where physical activity is both demanding and debilitating. Intuitively I have a problem with just lumping welders, bankers, and Wal-Mart greeters into a single labor demographic as if a welder can become a banker just as easily as a Wal-Mart greeter, or a banker a welder.
If the connection is the need for infrastructure investment because of the population boom, then the explanation for the cycles become the surge in development in a metro area as population pressure forces development in that area, or a fleeing to another metro area where a sudden surge in development takes place, with a decline in the economy in the other.
But is a population boom needed to drive a boom-bust cycle - couldn't a surge in building wind farms hitting Texas and reaching a peak followed by a rapid decline replaced by a boom in North Dakota as transmission lines opens that up, followed by a bust replaced by a boom in Iowa-Kansas create the volatility to boost the economy? With several parallel booms say in high speed rail for not just passenger but also freight (US rail speeds are lower today than they were in 1950 even tho the technology for speed is much better today.)
Of course, that points to another aspect of unease that I have. Saudi Arabia has a lot of oil wealth that has gone into lots of education and infrastructure investment coupled with a huge baby boom, so the demographics suggest that the economy should be producing the kind of growth that the US saw in the 50s, 60s, and 70s, with all the dynamic change when the US was heavily exploiting its oil and also responding to its baby boom. Politically, Saudi Arabia is constrained, but capitalism and trading are firmly established. That the public sector has been so large there is no different than the US when the government ran everything during the war and the switch from a command economy to a market economy in the US caused a lot of volatility mitigated by government continuing massive purchases of military gear for the cold war and for South East Asia conflicts.
Anyway, my ramblings return to the question:
What is business cycle volatility in plain language and is it good or bad, ie., something we want or something we fear? Or perhaps both want and fear?
Posted by: mulp at Jul 4, 2009 1:21:43 PM
More like blame it on the old for all retiring at once.
Posted by: Martin at Jul 4, 2009 2:48:43 PM
Damn the whipper snappers. They should have been as judicious about when they were born as the old were.
Posted by: Andrew at Jul 5, 2009 3:44:12 AM
we're still talking about the great moderation? really?
Posted by: josh at Jul 5, 2009 10:49:25 AM
How about other kinds of demographic change, like the kind that dropped California to almost the bottom of the school achievement rankings and turned out to mean that the new Californians couldn't earn enough to pay off their mortgages as well as the old Californians had?
Or is that simply off the table for economists to discuss because it's too important?
Posted by: Steve Sailer at Jul 5, 2009 4:25:04 PM
Damn the whipper snappers. They should have been as judicious about when they were born as the old were.
My thoughts exactly.
Posted by: anon at Jul 5, 2009 4:50:23 PM
The Baby Boomers are the pig in the python.
Posted by: 8 at Jul 6, 2009 8:18:04 AM
