Human Capital Business Cycles

Along with Edward Prescott for research on business cycles and macroeconomic policy.

So-called “forensic economists” frequently state that, because the economy goes through cycles, it is necessary to look at historical periods that are sufficiently long to “average out” the effect of business cycles.  They then proceed to use some arithmetic average of something over that period.  Perhaps they would be well advised to read the speech delivered by Finn Kydland when he accepted the 2004 Nobel Prize in Economic Science.  The essence of his speech was recently published in the December, 2006 issue of the American Economic Review.  Here is one of the more interesting quotations from that article:

"If you think about the life-cycle behavior of individuals, typically they earn relatively little labor income early in their lives, then experience a substantial increase in yearly income when they enter the middle stage, and, finally, for those who live long enough, enter a period in which they will have retired from market work.  In other words, the labor profile is decidedly hump-shaped.  But we also know that people prefer a consumption stream that is much more even over time.  So there will be a period in which they spend more than their income, then spend less for two or three decades, and finally revert to spending more than their labor income toward the end of their lives.”

Professor Kydland went on to discuss how many questions pertaining to business cycles are answered by a study of life cycle phenomena, such as those that are the subject of human capital economics.  He and Professor Prescott were awarded the Nobel Prize for their work in business cycles.

The complete text of Professor Kydland’s speech is available at the Nobel web site.








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