This paper analyses the role played by a social security system in
union-firm bargaining and in the resulting wage-productivity
spiral. In a first step, we derive the incidence of social security
on the bargaining process itself. In a second step, the macromodel
is extended to include the budget constraint of the social security
system. Both the distributive effect of wage bargaining and the
existence of payroll taxes reinforce capital-labour substitution.
Moreover, the social security system has a pro-cyclical effect in
case of a demand shock and a counter-cyclical effect in case of a
wage shock.