Pension Benefits, Labour Market Institutions, and Unemployment

Abstract.  As argued by Summers et al. (Quarterly Journal of Economics 1993; 108: 385–411) and Cigno (‘Is There a Social Security Tax Wedge?’, CESifo Working Paper No. 1772, 2006) public old-age pension benefits may work as a wage-moderating device, thereby lessening the distorting effects of labour taxation on unemployment. An implication of this argument is that there should be a negative relationship between the generosity of the pension system and the unemployment rate, for those countries where there is a strong link between individual contributions to the pension system and benefits, i.e. countries with Bismarckian pension systems. We test this hypothesis using a panel of 20 OECD countries for the time period of 1960–2004. The paper also provides evidence on the unemployment effects of various labour market institutions.