Christopher Way

Comparative Political Economy of Wage Distribution: The Role of Partisanship and Labour Market Institutions

Through a pooled cross-section time-series analysis of the determinants of wage inequality in sixteen OECD countries from 1973 to 1995, we explore how political-institutional variables affect the upper and lower halves of the wage distribution. Our regression results indicate that unionization, centralization of wage bargaining and public-sector employment primarily affect the distribution of wages by boosting the relative position of unskilled workers, while the egalitarian effects of Left government operate at the upper end of the wage hierarchy, holding back the wage growth of well-paid workers. Further analysis shows that the differential effects of government partisanship are contingent on wage-bargaining centralization: in decentralized bargaining systems, Left government is associated with compression of both halves of the wage distribution.

Public Sector Unions, Corporatism, and Macroeconomic Performance

What accounts for the apparent breakdown of the positive relationship between powerful trade union organizations and macroeconomic performance? Is corporatism a relic of a different age, a luxury of the long postwar boom? Although the authors answer the latter question in the negative, they do contend that existing arguments about the macroeconomic consequences of corporatism should be significantly modified to take into account the impact of the growth of public sector unions on the relationship between institutional structure of labor movements and economic outcomes. The deteriorating performance commonly attributed to corporatism in the 1980s was limited to countries in which unions in the public sector and other sectors not exposed to international competition increasingly dominated national labor movements. Encompassing trade union movements can still generate wage restraint, but only where the union movement is dominated by unions in the exposed sector that are subject to the constraints posed by international market competition.

Central Banks, Partisan Politics, and Macroeconomic Outcomes

What are the implications of the trend toward granting central bank independence for partisan theories of the macroeconomy? The conventional view is that parties of the Left and Right strive to achieve distinctive macroeconomic outcomes when in government. However, when faced with an independent central bank, parties of the Left may prove unable to produce their preferred partisan outcomes, whereas Right parties may be privileged in their ability to pursue their goals. Moreover, granting the central bank independence can be expected to have differing effects depending on whether Left or Right parties prevail in government. These issues are explored with a pooled time-series model of inflation and unemployment in 16 Organization for Economic Co-operation and Development countries from 1961 through 1991. The results support the claim that the effects of partisan government and central bank organization are mutually contingent. The pattern of results anticipated by partisan theory only arises where central banks are under political control, whereas when central banks are independent, Left governments are disadvantaged and Right governments privileged in their ability to achieve their partisan goals. On the other hand, the effects of central bank independence also depend on the partisanship of government, casting doubt on the claim that an independent central bank always provides a “free lunch” of lower inflation with no attendant costs in terms of increased unemployment.

Political Cycles and Exchange-Rate-Based Stabilization

Fixed exchange rates implemented to increase credibility and attract foreign investment, or as an alternative approach to stabilization in high inflation economies, have been shown to be successful in expanding economic activity and correcting inflation in the short term but often lead to undesirable outcomes in the medium to long term. Although there is a wealth of literature documenting the boom-bust cycles associated with the adoption of a nominal anchor, no adequate explanation has been proffered as to governments repeatedly choosing policies that are self-defeating. The authors address this question with a political economy explanation based on the notion of a self-interested government for which short-term stabilization is attractive in the face of incentives posed by the electoral cycle. If the election coincides with the boom phase of an exchange rate-based stabilization, incumbent governments increase the likelihood of gaining reelection, and the bust phase will develop, if at all, only after the contest. The authors thus suggest a modified version of the traditional political business cycle. From the standpoint of a self-interested office-seeking government, exchange rate-based stabilizations can make good political sense. Empirical results based on an analysis of eighteen Latin American countries from 1970 to 1999 support the insights of the argument: movements towards a more fixed exchange rate are greater than three times more likely in a preelection period than in other stages of the electoral cycle.

The Sectoral Composition of Trade Unions, Corporatism, and Economic Performance

There has been considerable debate as to whether powerful trade unions in European Union (EU) member states are compatible either with the internal market or with monetary union. As macroeconomic performance has deteriorated in many corporatist countries since the 1980s — Sweden providing the paradigmatic case — doubts about the compatibility of strong labor movements and EU membership have grown. Is corporatism a relic of a different age, a luxury of the long postwar boom? Are strong unions detrimental to and destabilizing for the internal market and monetary union in the EU? This article answers these questions in the negative. We contend, however, that existing arguments about the macroeconomic consequences of corporatism should be significantly modified to take into account the impact of the growth of public sector unions on the relationship between institutional structure of labor movements and economic outcomes. The deteriorating performance commonly attributed to corporatism in the 1980s was limited to countries where public sector unions increasingly dominated national labor movements. Encompassing trade union movements can still generate wage restraint, but only where the union movement is dominated by unions in the exposed sector that are subject to the constraints posed by international market competition. Hence, countries, such as Austria and Finland, with strong labor movements led by exposed sector unions are likely to enjoy the benefits of EU membership without suffering great costs, whereas the costs will be greater for countries with strong public sector unions such as Sweden and Norway.