Generational Conflict and Labor Market Turnover: A Tale of Employment Protection and Retirement Age

Abstract

This paper considers the political economy of employment protection and retirement age and analyzes interaction between labor market and the pension system. In the present scenario, young outsiders (unemployed) are the median group in the electorate. These voters choose the degree of employment protection and the legal retirement age which define an optimal labor market turnover and realize their preferred allocation of income and unemployment risk across time and states of the world. In equilibrium this defines an inverse relationship between the equilibrium level of employment protection and the mandatory retirement age.