Search

We propose a protocol for repeated bargaining where occasional periods of good outside opportunities yield improved outcomes but also higher breakout probabilities, yet there is a lot of risk sharing. Crucially, we only consider Markov perfect equilibria that have neither non payoff-relevant state variables that are costly to compute nor a contrived process of equilibrium selection.

Notre analyse demontre que le ratio monnaie-consommation augmente avec l’âge des menages et decroit avec la consommation, et que ce ratio a fortement augmente dans le contexte de tres bas taux d’interet des dernieres annees. Nous elaborons un modele a generations imbriquees de la detention de monnaie pour des motifs de transaction, dans lequel nous introduisons des effets d’âge (l’utilisation de la monnaie augmente avec l’âge des menages), des effets de cohorte (les jeunes generations font appel a des technologies financieres plus evoluees) et des effets temporels (les taux d’interet nominaux influent sur la detention de monnaie).

We build a variation of the neoclassical growth model in which households increased desire to save generate recessions. Our economy features three departures from the standard model: (1) goods markets (for nontradables) require active search from households wherein increases in consumption expenditures increase measured productivity; (2) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (3) labor markets have Nash bargaining wage setting and Mortensen-Pissarides search and matching frictions labor markets. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks.

In sticky wages models (either à la Calvo or à la Rotemberg), labor is solely determined by the demand side. However, a change of circumstances may make labor demand higher than agents’ willingness to work. We find that workers are required to work against their will between 15 percent and 30 percent of the time (with 5 percent wage markup, less with higher markups and in Rotemberg models). Estimating models with the minimum of the demand and supply of labor instead of the demand-determined quantity yields different and unappealing properties. Hence, special attention should be paid to possible violations of the labor supply constraint. (JEL E12, E24, E32, J22, J23, J31, J51)

We pose technology shocks where the innovation is biased towards more recently installed plants. On one extreme, the shock is like a neutral technological shock, while on the other end it resembles investment-specific technological shocks. We embed these shocks in a model with putty–clay technology and estimate it requiring that the model replicates the volatility properties of the Solow residual and the overshooting property of the labour share of output. Our estimates show that putty–clay nature of technology, a time bias towards new plants and competitive wage setting replicate well the overshooting property.

What is the role of credit scores in credit markets? We argue that it is a stand in for a market assessment of a person’s unobservable type (which here we take to be patience). We pose a model of persistent hidden types where observable actions shape the public assessment of a person’s type via Bayesian updating. We show how dynamic reputation can incentivize repayment without monetary costs of default beyond the administrative cost of filing for bankruptcy. Importantly we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both credit market data and the evolution of individual’s credit scores. We find a 3% difference in patience in almost equally sized groups in the population with significant turnover and a shift towards becoming more patient with age. If tracking of individual credit actions is outlawed, the benefits of bankruptcy forgiveness are outweighed by the higher interest rates associated with lower incentives to repay.

To slow COVID-19, many countries have shut down part of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young, retired), by sector (basic, luxury), and health status. Disease transmission occurs in the workplace, through consumption, at home, and in hospitals. We study the optimal economic mitigation policy for a government that can redistribute across individuals, but where redistribution is costly. Optimal redistribution and mitigation policies interact, and more modest shutdowns are optimal when redistribution is more costly. We find that the shutdowns that were implemented in mid-April were too extensive, but a partial shutdown should remain in place through the fall. A deeper and longer shutdown is preferred if a vaccine is imminent.

To slow the spread of COVID-19, many countries are shutting down non-essential sectors of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have the most to lose. In this paper, we build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young and retired), by sector (basic and luxury), and by health status. Disease transmission occurs in the workplace, in consumption activities, at home, and in hospitals. We study the optimal economic mitigation policy of a utilitarian government that can redistribute across individuals, but where such redistribution is costly. We show that optimal redistribution and mitigation policies interact, and reflect a compromise between the strongly diverging preferred policy paths of different subgroups of the population. We find that the shutdown in place on April 12 is too extensive, but that a partial shutdown should remain in place through July.

We present a novel way to model technological shocks, with the feature that it can be biased towards more recently installed production units. We show that at one extreme, the shock is like a neutral technological shock, while at the other end of the spectrum, it resembles investment specific technological shocks, since it affects newly created machines the most. To make these ideas operational, we embed our proposed shocks in a model with putty-clay technology (where the notion of new and old firms is clear). We estimate the process for the shocks requiring that the model replicates the volatility properties of the Solow residual and the overshooting property of the labor share of output. Our estimates point to three factors to be capable of replicating well such overshooting property: putty-clay nature of technology, a time bias in the shocks towards new plants and competitive wage setting.

In this paper we produce a theory of partial default applicable to sovereign debt. The theory uses Markovian equilibria and the notion that circulating unpaid coupons of any given country courtail its productive capabilities. As a consequence no issues of equilibrium selection appear in the analysis. The theory allows for renegotiation of the debt which occurs in particular dire circumstances. This theory, in contrast with the ones in the literature, is consistent with the main facts of international debt crises, which we document.

This paper proposes a new equilibrium concept - organizational equilibrium - for models with state variables that have a time inconsistency problem. The key elements of this equilibrium concept are: (1) agents are allowed to ignore the history and restart the equilibrium; (2) agents can wait for future agents to start the equilibrium. We apply this equilibrium concept to a quasi-geometric discounting growth model and to a problem of optimal dynamic fiscal policy. We find that the allocation gradually transits from that implied by its Markov perfect equilibrium towards that implied by the solution under commitment, but stopping short of the Ramsey outcome. The feature that the time inconsistency problem is resolved slowly over time rationalizes the notion that good will is valuable but has to be built gradually.

We explore the effects of financial shocks in heterogeneous agent economies with aggregate savings and with frictions in some consumption markets, where demand contributes to productivity. Households of various wealth and earnings levels search for goods at different intensities and pay different prices in differently crowded markets. Increases in savings arising from a financial shock that tightens the borrowing limit trigger a recession via two channels: 1) the reduction in the consumption of goods that are subject to search frictions reduces productivity and output; 2) because the poorest households are more affected by the shock, consumption tilts toward the richest households, causing an additional reduction in output and productivity. We model fixed prices in a competitive search environment and show how price rigidities dramatically exacerbate the recession.

The paper explores to what extent demand shocks can solve the open economy puz- zles. To this purpose, we pose a shopping model structure a la Bai, R Ì Ä±os-Rull, and Storesletten (2011) on top of an otherwise standard two-country international real busi- ness cycle model. Shopping for goods take effort, which prevents perfect matching between potential customers and producers. Larger demand in a country increases its consumption for both home and foreign goods. Real exchange rate and terms of trade depreciate in response to the larger demand. Larger demand also induces more shop- ping and so higher output and TFP. Thus, demand shock under our shopping model generates countercyclical terms of trade and solves the Backus-Smith puzzle.

This article is largely a description of the earnings, income, and wealth distributions in the United States in 2013 as measured by the Survey of Consumer Finances (SCF). We describe facts that lie at the joint distribution of the three variables. We look at inequality in relation to age, education, employer status, and marital status. We discuss the evolution of our results over the past 25 years (1989 - 2013), emphasizing the role played by the Great Recession. We pay special attention to the degree of income and wealth concentration at the top and discuss what the use of the SCF data can contribute to the ongoing debate on this topic. Finally, we look at which income sources and asset classes contribute most to income and wealth concentration.

Calibration and modern (Bayesian) estimation methods for a neoclassical stochastic growth model are applied to make the case that the identification of key parameters, rather than quantitative methodologies per se, is responsible for empirical findings. For concreteness, the model is used to measure the contributions of technology shocks to the business cycle fluctuations of hours worked and output. Along the way, new insights are provided in the parameter identification associated with likelihood-based estimation, the sensitivity of likelihood-based estimation to the choice of structural shocks is assessed, and Bayesian model averaging is used to aggregate findings obtained from different DSGE model specifications.

A productivity innovation reduces labor share at impact, making it countercyclical; it subsequently produces a long-lasting increase that peaks five years later at a level larger in absolute terms than the initial drop, before slowly returning to average, i.e., labor share overshoots . We estimate a bivariate shock process to the production function that under competition in factor markets accounts for this overshooting. We pose this process in an otherwise standard real business cycle economy, and we find that the contribution of productivity innovations to the variance of hours is 1% of that in the standard RBC model.

consequently, have different redistributional properties which is what we explore in this paper. For Canada, which has a positive net asset position with respect to the rest of the world in Canadian dollar-denominated claims, we show that the magnitude of the effects of an unexpected price level increase under IT is larger than under PT. Households’ wealth loss from a price level increase is matched by the gains of the government and foreigners. Even though this redistribution is zerosum, we observe positive effects on GDP due to the wealth loss, the lower value of the debt and its associated fiscal adjustment, and the non-linear effects on work effort of the redistribution of wealth across households. Although the effects on GDP are positive, the direction of the change in the weighted welfare of households depends on the fiscal policy.

Between 1970 and 1990, the share of elderly widows living alone grew by 23.2% in the United States, whereas those living with their children decreased by a similar amount. We pose a variety of models for determining the living arrangements in which living together increases consumption because of economies of scale and may also provide utility directly. We estimate these models using the 1970 data and obtain an excellent fit. The estimated models predict that changes in the incomes of both the widow and her offspring generate three-quarters of the increase in the number of widows living alone.

Global financial imbalances can result from financial integration when countries differ in financial markets development. Countries with more advanced financial markets accumulate foreign liabilities in a gradual, long‐lasting process. Differences in financial development also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of nondiversifiable equity and foreign direct investment. Three observations motivate our analysis: (1) financial development varies widely even among industrial countries, with the United States on top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international financial integration; (3) the portfolio composition of U.S. net foreign assets features increased holdings of risky assets and a large increase in debt.

In this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure. We characterize and solve for Markov-perfect equilibria of the dynamic game between successive governments. The characterization consists of an inter-temporal first-order condition (a "generalized Euler equation") for the government, and we use it both to gain insight into the nature of the equilibrium and as a basis for computations. For a calibrated economy, we find that when the only tax base available to the government is capital income—an inelastic source of funds at any point in time—the government still refrains from taxing at confiscatory rates. We also find that when the only tax base is labour income the Markov equilibrium features less public expenditure and lower tax rates than the Ramsey equilibrium. Copyright 2008, Wiley-Blackwell.

We build an aggregate model with difierent size houses and liquid assets. Typical households are born, are subject to idiosyncratic earnings risk and save for both life cycle reasons and housing reasons. Typically, a subset of these households, after accumulating some assets, put a down payment and buy a small, starter’s, house or ∞at. As time passes, some households upgrade to a larger and nicer house. Households with houses may also eventually downgrade to a ∞at or even to no house and ∞at owners may sell. Our speciflcation attempts to replicate some important features of modern aggregate economies: The distribution of earnings and of housing and non-housing wealth as well as some macroeconomic aggregates, including features of the mortgage issuing sector.

In this paper we ask whether an aspect of social security, namely its role as a provider of insurance against uncertain life spans, is welfare enhancing. To this end we use an OLG model where agents have a bequest motive and differ in sex and marital status and where families are formed and destroyed and their characteristics evolve (exogenously) according to U.S. demographic patterns of marriage, divorce, fertility and mortality. We compare the implications of social security under a variety of market structures that differ in the extent to which life insurance and annuities are available. We find that social security is a bad idea. In economies where the private sector provides annuities and life insurance, it is a bad idea for the standard reason that it distorts the intertemporal margin by lowering the capital stock. In the absence of such securities social security is still a very bad idea, only marginally less so compared with economies with annuities and life insurance. We also explore these issues in a world where people live longer and we find no differences in our answers. As a by-product of our analysis we find that the existence of life insurance opportunities for people is important in welfare terms while that of annuities is not.

A necessary feature for equilibrium is that beliefs about the behavior of other agents are rational and indi viduals maximize. We argue that in stationary OLG environments this implies that any future generation in the same situation as the initial generation must do as well as the initial generation did in that situation. We conclude that the existing equilibrium concepts in the literature do not satisfy this condition. We then propose an alternative equilibrium concept, organizational equilibrium, that satisfies this condition. We show that equilibrium exists, it is unique, and it improves over autarky without achieving optimality. Moreover, the equilibrium can be readily found by solving a maximization program. *Rios-Rull thanks the National Science Foundation for Grant SBR-9309514 and the University of Pennsylvania Re search Foundation for their support. Prescott thanks the National Science Foundation for grant SBR-9996201. We thank Julio Davila, Igor Livshits, Larry Jones, Dan Silverman, and attendants at seminars in the Penn macro lunch group, Federal Reserve Bank of Minneapolis, Cornell-Penn State University Macro-Theory Conference, the Univer sity of Rochester, UCLA, and the 1999 Midwest Theory Meetings for comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

This article studies the properties of optimal fiscal policy in a stochastic growth model when the government cannot commit itself beyond the next period’s capital income tax rate. We find that the results contrast markedly with those under full commitment. First, capital income tax rates are very high (65% on average versus close to zero on average under full commitment). Second, labor income taxes are rather low on average (about 12% versus a value of around 31% under full commitment). Finally, labor income taxes are quite volatile, whereas under full commitment their standard deviation is essentially zero.

We study the role of habit formation in shaping the amount of precautionary savings and the wealth distribution in heterogeneous agents model economies with idiosyncratic uncertainty. We adjust preferences to equate the Intertemporal Elasticity of Substitution in all model economies. We find that habit formation brings a hefty increase in precautionary savings and very mild reductions in the coefficient of variation and in the Gini index of wealth. These findings hold for both persistent and non-persistent habits, with the effects of the former being much larger.

In this paper we study the implications of taxing overtime work in order to reduce the workweek. To this purpose we study the roles played by team work, commuting costs and idiosyncratic output risk in determining the choice of the workweek. In order to obtain reliable estimates of the consequences of our policy experiment, we calibrate our model economy to the substitutability between overtime and employment using business cycle information. We find that a tax-rate of 12% of overtime wages implements the desired reduction of the workweek from 40 to 35 hours (12.5%). We also find that this tax change increases employment by 7% and reduces output and productivity by 10.2% and 4.2%, respectively. We also study a model economy with cross-sectional variations in the workweek that arise from plant-specific output risk and we find that in this model economy the tax-rates needed to achieve the same workweek reduction are significantly larger. Finally, we find that taxing overtime dampens business cycle fluctuations and that its welfare costs seem to be very large

Political and economic transitions of non-market economies often go hand in hand. We propose an economic theory of this transition process, which highlights how the success of such a transition depends upon the policies chosen in the new democratic environment. In this paper, economic success is characterized by the continual adoption of new technology (and economic growth), which requires costly human capital investment. The political choice is whether to allow the adoption of new technology. As a non-market economy begins its transition, agents with human capital specific to a particular technology find it in their interest to vote against continued innovation. As such, the transition to a market economy can be choked off. Our theory has the following features: (i) an economic transition is associated with a substantial drop in output; (ii) it is in the interest of large groups in the population to resist laissez–faire, as factor payments equal marginal products in the post–reform economy; (iii) although the joint move to democracy and a market economy does make people better off, it is insufficient for the transition to be successful, as the number of agents with a vested interest against continued innovation grows; and (iv) a temporary\/ restriction on voting rights which ensures a laissez-faire regime is sufficient to produce long-run\/ prosperity. This restriction may not be only one capable of overcoming the anti–innovation interests. Other mechanisms such as supermajority rules on policy changes may also guarantee laissez–faire.

Up to the late 1970's the Sex College Attainment Ratio (SCAR), or ratio of college attainment between men and women, was about 1.6. Assortative mating within education groups in marriages is strong enough in the United States to prevent accounting for the SCAR feature based on males' higher earnings. We document the puzzling nature of the SCAR, and we explore various theories to account for it. Our main finding is that if parents' well-being is affected by the number of grandchildren, gender differences in the steepness of the negative relation between educational attainment and number of children provides the best theory to understand the SCAR. Journal of Economic Literature Classification Numbers: J12, J16, I20.

We ask two questions related to how access to credit affects the nature of business cycles. First, does the standard theory of unsecured credit account for the high volatility and procyclicality of credit and the high volatility and countercyclicality of bankruptcy filings found in U.S. data? Yes, it does, but only if we explicitly model recessions as displaying countercyclical earnings risk (i.e., rather than having all households fare slightly worse than normal during recessions, we ensure that more households than normal fare very poorly). Second, does access to credit smooth aggregate consumption or aggregate hours worked, and if so, does it matter with respect to the nature of business cycles? No, it does not; in fact, consumption is 20 percent more volatile when credit is available. The interest rate premia increase in recessions because of higher bankruptcy risk discouraging households from using credit. This finding contradicts the intuition that access to credit helps households to smooth their consumption.

The supply and price of skilled labor relative to unskilled labor have changed dramatically over the postwar period. The relative quantity of skilled labor has increased substantially, and the skill premium, which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980. Many studies have found that accounting for the increase in the skill premium on the basis of observable variables is difficult and have concluded implicitly that latent skill-biased technological change must be the main factor responsible. This paper examines that view systematically. We develop a framework that provides a simple, explicit economic mechanism for understanding skill-biased technological change in terms of observable variables, and we use the framework to evaluate the fraction of variation in the skill premium that can be accounted for by changes in observed factor quantities. We find that with capital-skill complementarity, changes in observed inputs alone can account for most of the variations in the skill premium over the last 30 years.

In this paper we study the effects of certain types of public compulsory insurance arrangements for aggregate shocks on private allocations in environments with limited commitment. We show that this type of insurance can improve the wellbeing of private situations, but it can also deteriorate it. We also describe how different characteristics of the environment affect the role of public insurance. Using data on the Mexican PROGRESA program, we document the impact that some government programs have in crowding out private transfers.

We study a dynamic version of Meltzer and Richard's median-voter analysis of the size of government. Taxes are proportional to total income, and they are used for government consumption, which is exogenous, and for lump-sum transfers, whose size is chosen by electoral vote. Votes take place sequentially over time, and each agent votes for the policy that maximizes his equilibrium utility. We calibrate the model and its income and wealth distribution to match postwar U.S. data. This allows a quantitative assessment of the equilibrium costs of redistribution, which involves distortions to the labor-leisure and consumption-savings choices, and of its benefits for the decisive voter. We find that the total size of transfers predicted by our political-economy model is quite close to the size of transfers in the data.

In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline more than twice as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over.

We propose a notion of dynamic politico-economic equilibrium which builds on two key assumptions: policies are determined sequentially, and agents are fully rational in their roles as both consumers and voters. We examine a simple model of endogenous growth and infinitely-lived agents, where taxes on income are endogenous and where growth critically depends on the initial distribution of asset holdings. We relate our equilibrium definition and results to existing literature on time consistency and on political economy and growth. We show that our equilibria are time-consistent and we argue that the choice of equilibrium concept might have important quantitative implications.

We build a variation of the neoclassical growth model in which both wealth shocks (in the sense of wealth destruction) and financial shocks to households generate recessions. The model features three mild departures from the standard model: (1) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (2) there is a mild form of labor market frictions (Nash bargaining wage setting with Mortensen-Pissarides labor markets); (3) goods markets for nontradables require active search from households wherein increases in consumption expenditures increase measured productivity. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks.

We build a variation of the neoclassical growth model in which both wealth shocks (in the sense of wealth destruction) and financial shocks to households generate recessions. The model features three mild departures from the standard model: (1) adjustment costs make it difficult to expand the tradable goods sector by reallocating factors of production from nontradables to tradables; (2) there is a mild form of labor market frictions (Nash bargaining wage setting with Mortensen-Pissarides labor markets); (3) goods markets for nontradables require active search from households wherein increases in consumption expenditures increase measured productivity. These departures provide a novel quantitative theory to explain recessions like those in southern Europe without relying on technology shocks.

In this paper we develop a model in which a country faces a balance of payments crisis if constraints on its international borrowing bind. We use the model to describe the dynamics of the trade balance, capital account, and balance of payments of a country that borrows to finance consumption following sweeping macroeconomic and structural reforms and then hits constraints on its international borrowing. We compare the predictions of this theoretical example with events in Mexico from 1987 through 1995.

We use political-equilibrium theory and the neoclassical growth model to compare consumption and income tax systems. If government outlays are used for redistribution through transfers, then steady-state equilibria in societies that use income taxes are not necessarily worse in welfare terms, and may even be better. Income taxes are attractive precisely because they are more distortionary, since this implies low equilibrium transfer levels. We also find that switching tax systems typically does not benefit the median voter; moreover, a change from income to consumption taxes may make everybody worse off.

We build a variation of the neoclassical growth model in which financial shocks to households or wealth shocks (in the sense of wealth destruction) generate recessions. Two standard ingredients that are necessary are (1) the existence of adjustment costs that make the expansion of the tradable goods sector difficult and (2) the existence of some frictions in the labor market that prevent enormous reductions in real wages (Nash bargaining in Mortensen-Pissarides labor markets is enough). We pose a new ingredient that greatly magnifies the recession: a reduction in consumption expenditures reduces measured productivity, while technology is unchanged due to reduced utilization of production capacity. Our model provides a novel, quantitative theory of the current recessions in southern Europe.

We investigate the welfare properties of the one-sctor neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the constrained efficiency notion of the general equiibrium literature, and we demonstrate constrained inefficiency for our model. We provide a characterization of constrained efficiency that uses the first-order condition of a constrained planner's problem that points to the margins of relevance for whether capital is too high or too low : the income composition of the (consumption) poor. We calibrate our benchmark model parameters governing idiosyncratic risks to the U.S. earnings and wealth distribution, and for this distribution the income of the poor is mainly composed of labor earnings. We compute the constrained-efficient allocations -including transition dynamics- for our model economy, and we conclude that the long-run capital stock in a laissez faire world is not only too low, but much too low. We also show that one can find parameterizations with different qualitative features : in one case, the steady-state capital stock is too high, and in another case no steady state exists., On considère l'efficacité de l'allocation de ressources du modèle néoclassique de croissance avec des risques idiosyncrasiques. On utilise la notion d'efficacité restreinte de la littérature d'équilibre général, et on montre l'inefficacité restreinte de l'allocation dans notre modèle. On caractérise l'efficacité restreinte par les conditions de premier ordre du planificateur, ce qui montre la composition du revenu des agents pauvres (en consommation) comme l'élément essentiel pour déterminer si le capital accumulé est trop élevé ou trop bas. On paramètre le risque idiosyncrasique de notre modèle de référence d'après les distributions de richesse et revenu des Etats-Unis, où le revenu des pauvres provient du travail. On calcule les allocations efficaces restreintes -y compris la dynamique de transition- de notre modèle, et on en déduit que l'accumulation de capital de long terme dans un régime de laissez-faire n'est pas seulement trop faible, mais beaucoup trop faible. On montre aussi l'existence de paramétrisations menant à des situations qualitativement différentes : dans un cas, le capital accumulé à l'état stationnaire est trop élevé, et dans un autre cas il n'y a pas d'état stationnaire.

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.