Honor Thy Parents, Inhabit Their Basement

Very few young adults relish the prospect of moving back in with their parents after living away from home. Recent research by Greg Kaplan published in the Journal of Political Economy shows that the availability of this option can prove to be a very valuable form of unemployment insurance, providing not only short-term protection from economic shocks but also long-term wage growth.

Kaplan’s study “Moving Back Home: Insurance against Labor Market Risk” analyzed data from 1,491 male youths ranging in age from seventeen to twenty-three from the monthly data of the National Longitudinal Survey of Youth 1997. The group studied consisted of non-college-bound students directly entering the workforce and their related employment and residential histories. From the data, Kaplan observed that it was those young adults with the lowest wage-earning parents that were most likely to move back home, as higher-income parents were able to provide monetary transfers to their children instead of having them return home.

This form of non-market insurance affects the behavior of those to whom it is available by serving as a form of banked savings or insurance. Kaplan notes that consumption rates of young men who experienced job loss with no parental support were 47 percent lower, on average, than those of young men were able to move back into their parents’ home. Moreover, this group had a lower savings rate than young men with parental support. When the option to move back home was removed, the savings rate of those observed increased by 16 percent, on average, and another 10 percent increase occurred when the possibility of financial support from parents was removed.

Nevertheless, there was a clear benefit to moving back home. Young adults with the option to move back home were able to hold out longer during periods of unemployment and wait for positions that maintained their previous wage trajectory. Kaplan estimates that young men who cannot move back home have a 15 percent higher acceptance rate of new job offers. By age twenty-three, those that have the option to move back home earn 5 percent more than their counterparts, on average. In general, those young adults who lost their job at age twenty received a large hit to their earning potential over the next six years, but this effect was largely mitigated by being able to move back in with their parents.

This research confirms that the return to parental co-residence offers a form of insurance to young workers, which is not generally captured in economic data demonstrating participation in official unemployment insurance programs. This phenomenon perhaps eases the shocks from cyclical short-term fluctuations in the labor market and masks a systemic dependence on non-market forms of assistance.

In addition, both parents and their adult children living with them pay a cost related to the mental stress of this situation. The study revealed that 40 percent of the twenty-two year olds surveyed had moved back home for at least one month, and the median time spent there was sixteen months. As young adults lean harder on their parents for economic support, the dynamics of the family unit may shift under that weight as well.

Feature photo: cc/fudj