Are Recessions Good for Young People

We construct a stochastic overlapping generations model in which households of di¤erent ages are subject to aggregate shocks that a¤ect both wages and asset prices. We use a realistically calibrated version of the model to assess the distributional consequences of severe recessions. More speci…cally, within the context of this model we ask whether young people can be better o¤ if they become economically active in the midst of a large and persistent economic downtown. The key to the answer is the size of the decline in asset prices, relative to the decline in wages. If older generations have a strong incentive to sell their assets in the downturn to …nance old-age consumption (e.g. because they strongly value smooth consumption pro…les) then asset prices decline more strongly than wages in equilibrium. This in turn bene…ts younger generations that can buy these assets at low prices, more than compensating the fall in wages these generations experience. We demonstrate that for realistic parameter values this mechanism is indeed strong enough to generate welfare gains from recessions for young generations. Older cohorts, on the hand, face massive welfare losses from large economic downturns. Keywords: Recession, Overlapping Generations, Asset Prices JEL Codes: E21, D31, D58, D91 Very preliminary and incomplete. Please do not cite. We thank participants of the Wharton Macro Lunch and the Per Krusell conference at the Richmond FED for helpful comments, Andy Glove for able research assistance and the NSF for …nancial support.