Pensions and insider-outsider unemployment

Published in JITE (Journal of Institutional and Theoretical Economics), 2005, vol. 161, no. 4 (December), pp. 708-728

Keywords: insider-outsider unemployment, learning by doing, pay-as-you-go pension system

Download: Drastically improved revision (with slightly changed title) of Free University Berlin economics discussion paper 2001/06 which was presented at the 2001 European Economic Association (EEA) meeting and at the 2001 Institute for the Study of Labor (IZA) conference "Pension Reform and Labor Markets". (An older version was posted as research report 2001/3 at the Centre for Pensions and Social Insurance, dead link now.) Final version May 2005(PDF)

Abstract: If workers gain an insider position through past activity, young workers will bear the resulting outsider unemployment burden. In a world where productivity of employed workers rises because of learning-by-doing, and where labor demand is sufficiently elastic, preventing this unemployment (by lowering wages) leads to a higher income tax base in the future. Thus the institution of certain intergenerational transfer schemes provides an incentive for insiders to lower wages. In a stylized overlapping generations model I show that this effect partially or fully abolishes unemployment in the steady state equilibria.

(Latest update: October 2017)