The business cycle, labor market transitions by age, and the great recession

ABSTRACT

Using matched monthly CPS data, this article studies differences in labour force transitions across age groups focusing on periods prior to and after the start of the Great Recession. Monthly transitions between employment, unemployment, and nonparticipation of 25–55-year-old males are examined from 1996 through 2013. Prior to the Great Recession (1996–2007), younger groups of workers are more likely to move from employment to unemployment and face an increased risk beyond that of other workers of making this transition as the economy worsens; however, this differential responsiveness no longer appears after the start of the Great Recession. Before and after the start of the Great Recession, younger groups of workers are more likely to move from unemployment to employment; however, there is no extra responsiveness among younger workers to the business cycle. Transitions into and out of the labour force nuance these findings; however, there is no evidence of differential responsiveness among younger workers since the start of the Great Recession. These findings challenge interpretation of the movements of unemployment rates by age group over the business cycle as being driven by differential hiring and firing particularly since the start of the Great Recession.

KEYWORDS:

• Labor market transitions
• Great Recession
• unemployment
• business cycle
• aging

JEL CLASSIFICATION:

• J63
• J21
• J23
• J14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The greater cyclical sensitivity of employment among younger workers is consistent with early theoretical work by Oi (1962) that argues firms have incentives to retain their more experienced and productive workers during downturns.

² The possible transitions are from employed to unemployed or not in the labour force, from unemployed to employed or not in the labour force, from not in the labour force to employed or unemployed.

³ The NRU of 5.28 is taken from the prior research of Couch and Fairlie (2010). More detail on its estimation can be found there (232).

⁴ The gap in equilibrium stock unemployment rates can be decomposed into portions due to differences in unemployment entry and exit rates (Abraham and Shimer 2001).

⁵ The model controls for marital status (married = 1; 0 otherwise), three educational levels, three types of occupation, and fourteen types of industry.