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Can Labor Market Imperfections Motivate the Implementation of an Income-Based Pension System?

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Abstract
This paper concerns the timing of taxation in an economy with trade unions. By using insights from the industrial organization literature, we show within the framework of an overlapping generations model where agents work in the first period of life and are retired in the second that trade unions can obtain an advantageous bargaining outcome vis-à-vis firms by delegating authority to a negotiator who (i) discounts the future at a higher rate than the union members, and (ii) treats the workers´ labor supply and saving decisions as given. In this context, the timing of taxation of first period labor income matters for wage formation and we show that the welfare can be improved by implementing an income-based pension for retired workers (i.e. a negative delayed income tax) when there is unemployment in equilibrium. We also outline when the welfare can be improved by implementing a positive delayed income tax. Finally, we show that if the trade union delegates authority to a negotiator who recognizes the workers´ labor supply and saving responses, the welfare cannot be improved by implementing a second period tax/pension.

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  • Gustafsson, Johan & Sjögren, Tomas, 2024. "Can Labor Market Imperfections Motivate the Implementation of an Income-Based Pension System?," Umeå Economic Studies 1024, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:1024
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    More about this item

    Keywords

    Timing of taxation; labor market distortion; pensions;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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