Some more evidence that demography matters. The NBER Summer Institute 2006 workshop on Impulse and Propagation Mechanisms which began today includes a fascinating paper from Nir Jaimovich, UC San Diego, and Henry Siu, University of British Columbia: The Young, the Old, and the Restless: Demographics and Business Cycle Volatility (PDF). It finds that a "significant part" of the moderation of post-war business cycles in the G7 economies is due to changes in the age composition of the labour force:
In this paper we investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition ofthe labor force account for a significant fraction of the variation in businesscycle volatility observed in the US and other G7 economies. During the postwar period, these countries have experienced dramatic demographic change, though details regarding extent and timing 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 US business cycle volatility. Through simple quantitative accounting exercises, we find that demographic change accounts for a significant part of this moderation.
What is the mechanism? The authors find an "empirical regularity" in the G7 economies: age-specific diﬀerences in business cycle responsiveness of market work.
...the age profile of business cycle employment volatility can be roughly characterized as U-shaped, with large diﬀerences across age groups. The young and old display greater cyclical sensitivity than prime-aged individuals.
...the crucial channel of influence of demographic composition on business cycle volatility operates through diﬀerences in the sensitivity of market work across age groups.
UPDATE: Greg Mankiw has also noticed the paper, calling it "The most intriguing hypothesis I heard today."