3.4 The volatility profile
Finally, the introduction of human capital into the baseline RBC model also has some implications regarding the volatility profile. Fig.5 shows the volatility of hours worked (relative to output volatility) by age group. Consistently with the data , the profiles generated by Model1 through Model3 are U-shapes: labor supply is more volatile for young and old agents compared to middle-age agents. Instead, the life-cycle RBC model without human capital, Model4, predicts an increasing volatility profile. The introduction of human capital increases the volatility for young agents who are more willing to reduce hours worked because they earn a lower labor income, are more from education. As a result, the volatility profile assumes a “U” shape. This result is independent of the type of heterogeneity considered. All models with human capital show a U-shaped profile. This is consistent with Hansen(2009), who find that volatility profile is increasing when human capital is constant across agents, while it assumes a “U” shape when human capital differences among agents are introduced in the model. However, the model with heterogeneity within ages produces the closest profile to the data.