Growth and unemployment in an OLG economy with public pensions

This paper develops an overlapping generations model including (1) a productive externality as an engine of endogenous growth and (2) wage setting by trade unions as the cause of unemployment. Within this framework, the paper considers growth and unemployment affected by public pensions under the following two types of pension system: the proportionate pension system where only the contributors, that is, the employed, receive pensions, and the lump-sum pension system where both the employed and the unemployed receive pensions. It is shown that public pensions create a trade-off between growth and employment in the former system, whereas they produce no trade-off in the latter.