Pensions and Strategic Prevention of Unemployment

If unionized workers gain an insider position through past affili-ation with their firm, young workers entering the labor market will bear the resulting insider-outsider unemployment burden. The adop-tion of a pay-as-you-go pension scheme provides an incentive for the insider union to prevent unemployment by lowering wages. The rea-son is a higher social security tax base in the future induced by higher productivity of (formerly) young workers through on-the-job learning. This paper presents a stylized overlapping generations model im-plementing the above arguments. By deriving the steady state equi-libria it is shown that unemployment can be partially or fully abol-ished, provided that labor demand is sufficiently elastic with respect to wages. The conditions for the equilibria to be subgame perfect are also given