Living Arrangements and Labor Market Volatility of Young Workers

Household size is countercyclical, mainly because of young people moving into or delaying departure from the parental home. Those living in older households earn less and have more volatile hours than their peers living alone. We pose a theory of household formation and labor choice over the business cycle. Young people decide where to live depending on their wage, taste for living within the old household, and implicit transfers received. Our theory accounts for the bulk of the contribution of the households size volatility to the volatility of the aggregate hours. Including people with varying living arrangements yields an implied aggregate, or macro, Frisch elasticity around 70 percent larger than the assumed micro elasticity.