Working Paper: CEPR ID: DP9336
Authors: Pietro Reichlin
Abstract: We construct an overlapping generations model with unemployment risk where wages, employment and severance payments are set through efficient bargaining between risk averse Unions and risk neutral firms. Assuming that a First Best cannot be achieved due to workers' shirking incentives, we characterize a Second Best allocation and show how this can be implemented in a market economy. We prove that the latter generates too little employment and consumption smoothing, an excessive young age consumption and too much saving with respect to the Second Best. This inefficiency can be reduced by increasing the intensity of a pay-as-you-go social security system even if the economy is dynamically efficient.
Keywords: labor markets; risk; social security; unemployment
JEL Codes: A1; H2; J5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pay-as-you-go social security system (H55) | welfare improvement (I38) |
| pay-as-you-go social security system (H55) | increased employment rates among older workers (J26) |
| pay-as-you-go social security system (H55) | reduced contractual insurance provided by firms (G22) |
| reduced contractual insurance provided by firms (G22) | increased employment (J68) |
| pay-as-you-go social security system (H55) | improved consumption smoothing (D15) |
| improved consumption smoothing (D15) | increased welfare (I38) |
| unions negotiating better terms (J50) | complement social security (H55) |