Social Security, Unemployment Risk and Efficient Bargaining between Unions and Firms

Pietro Reichlin

No 9336, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: A1 H2 J5 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-age and nep-dge
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Working Paper: Social Security, Unemployment Risk and Efficient Bargaining between Unions and Firms (2013)
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