Bhattacharya, Joydeep; Reed, Robert

Structural Models of Wage and Employment Dynamics: Essays in Honor of Dale Mortensen, Elsevier Science, Amsterdam, (2006) (Originally published as WP #06028, August 2006)

Many countries around the world have large public pension programs with significant cross-cohort redistribution. This paper provides a rationale for such programs in a lifecycle framework with search and matching frictions in the labor market. In the model, public pension programs alter the age composition of the labor force by inducing the jobless elderly to retire. This improves the allocation of workers to jobs, raises firm entry and may also improve welfare. By requiring a long history of labor market attachment as a precondition to receiving benefits, these programs raise the future value of current employment for the young. This redistributes bargaining strength and income from the young to the old.

JEL Classification: J41, J64, E24

Keywords: search, labor market efficiency, unemployment, lifecycle, pensions

Full Text