Social Security and Old-Age Unemployment Risk with Efficient Wage Bargaining

Abstract

I analyze an overlapping generations model with old age productivity risk where wages, employment and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Equilibrium allocations with limited union membership are second-best inefficient as they generate too little labor supply in young age, too much consumption before retirement age, too little employment of older workers (early retirement) and too little insurance against old age unemployment. Public transfers to early retirees may produce efficiency gains even if they have a negative effect on old age employment. Layoff taxes may increase old age employment but they may come at the cost of lower insurance against the risk of early retirement.