Why is old workers' labor market more volatile?: unemployment fluctuations over the life-cycle

Since the last recession, it is usually argued that older workers are less affected by the economic downturn because their unemployment rate rose less than the one of prime-age workers. This view is a myth: older workers are more sensitive to the business cycle. [The authors] document volatilities of worker flows and hourly wage across age groups on [current population survey] CPS data. [The authors] find that old workers' job flows are characterized by a higher responsiveness to business cycles than their younger counterparts. In contrast, their wage cyclicality is lower than prime-age workers'. Beyond this empirical contribution, [the authors] show that a life-cycle Mortensen and Pissarides (1994) model is well suited to explain these facts: older workers' shorter work-life expectancy endogenously reduces their outside options and leads their wages to be less sensitive to the business cycle. Thus, in a market where wage adjustments are small, quantities vary a lot: this is the case for older workers, whereas the youngest behave like infinitively-lived agents. Our theoretical results point out that Shimer (2005)'s view on the [Mortensen-Pissarides] MP model is consistent with prime-age workers' labor market while aging endogenously introduces real wage rigidities, allowing to match what [the authors] observe for old workers, without specific assumptions as in Hagendorn and Manovskii (2008).

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