Demographics, job polarization, and macroeconomic analysis of labor markets.

• Author: Jaimovich, Nir

In the past 50 years, labor markets in the United States and other industrialized countries have experienced marked change due to technological progress and demographic shifts. In this piece, we summarize some of our joint work, much of which is in collaboration with our coauthors, on the implications of these long-run trends for macroeconomic and labor market phenomena.

This summary is organized into two themes. The first emphasizes important age differences in labor market outcomes, and how changes in an economy's age composition impact the level of aggregate unemployment and the severity of business cycle fluctuations. We then turn attention to the phenomenon of job polarization, specifically the disappearance of employment opportunities in occupations focused on "routine" tasks. Our work investigates the implications of this process for labor market dynamics for varied demographic groups, as well as for the changing nature of business cycle recoveries.

Demographics

Since World War II, industrialized countries have experienced dramatic demographic changes. We have investigated the consequence of this for business cycle analysis. (1) 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 G7 economies.

To do this, we first show that, over the business cycle, the young experience much greater volatility of employment and hours-worked than the prime-aged, while those closer to retirement age experience volatility somewhere in-between. For instance, in the United States, the volatility of hours-worked for 15 to 29-year-olds over the business cycle is nearly 2.5 times greater than that of 40 to 49-year-olds; as a result, though individuals under the age of 30 account for about one-quarter of aggregate hours, they account for close to half of aggregate hours volatility. Given this, a natural conjecture is that the responsiveness of the macro-economy to business cycle shocks depends on the age composition of the workforce.

Next, we exploit variation in the nature and timing of demographic change that has been observed across countries. For instance, the dramatic baby boom of the 1950s and 1960s was followed by a baby bust in the United States. By contrast, Japan experienced a sharp decline in fertility after WWII that has continued to the present day, save for a mild rebound in the 1970s. This variation across G7 countries allows us to determine the causal role of age composition on macroeconomic volatility.

The nature of our results is illustrated in the graph below, where we display the share of the labor force of "volatile age" (i.e., the young and old), along with a measure of business cycle volatility. Cyclical volatility tracks the volatile-aged share very closely. We establish this more formally in the paper using panel data techniques for all G7 economies. We find that the aging of the baby boomers accounts for approximately one-quarter of the...