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Using a simple overlapping generations model with the growth engine of public capital by incorporating the union wage setting, we examine the effects of fiscal policies on unemployment, economic growth and welfare in the imperfect labor market. We demonstrate that the growth-maximizing tax in the imperfect labor market is larger than that of the perfect labor market. However, as the allocation ratio of public capital increases, the growth-maximizing tax in the imperfect labor market approaches that of the perfect labor market, thus reducing the unemployment rate. The policy implications of the intergenerational welfare aspects are also mentioned.

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Incorporating heterogeneity in preference to having children into an overlapping generations model of a small open economy, we examine the effects of changes in the size of pay‐as‐you‐go (PAYG) social security on fertility choices of individuals and population growth of the economy. It is shown that PAYG social security will raise population growth by increasing the number of individuals who have children and the number of children parents have if the system involves redistribution between retirees with different contributions, whereas, if it has no redistribution, PAYG social security does not affect the fertility decisions of individuals.