Government Partisanship, Labor Organization, and Wage Inequality

Government Partisanship, Labor Organization,

and Inequality in OECD countries, 1970-92

YHB

1. Introduction.

        After sharing a common pattern of narrowing educational and occupational wage differentials in 1970s, advanced countries have experienced widening gaps in the differential since 1980s. Yet the change develops in uneven way. One can see a large rise in the differentials in United Kingdom and United States, modest rise in Australia, Sweden, and Japan, and no noticeable change in Netherlands, France, Germany, and Italy (Freeman and Katz, 1995). What explains these varying degrees of changes in wage differentials in those countries?

This paper addresses effects of government partisanship and labor organization on the wage inequality in OECD countries, 1970 to 1992. I argue that the leftist partisanship and dense labor organization tend to reduce the wage inequality, even with controlling for other relevant variables such as inflation, unemployment, GDP per capita, trade, and capital liberalization.

The remainder of the paper is divided into five sections. Section 2 reviews the literature on the wage inequality, focusing on “supply and demand of skills,” “wage-setting institutions,” and “government partisanship” explanations. Section 3 describes two research hypotheses about effects of the partisanship and labor organization on the wage gap. Section 4 discusses the methodological issues such as measurement, data sources, and model specification. Section 5 deals with findings from the time-series cross-section analyses on which the paper depend. Finally, section 6 draws out conclusions and implications of the paper.

2. The Literature Review.

There are roughly three kinds of explanations on wage inequality: supply and demand of skills, wage-setting institutions, and government partisanship. The first type of explanations is, according to Conceição and Galbraith (2001), grounded on the assumption that wages are the result of market clearing via the competitive pricing of workers’ capabilities associated with skill, education, and seniority in the workforce. The evolution of the difference between the prices of skills depends on the interaction between shifts in the relative demand for more-skilled labor and changes in the relative supply of skilled labor. Factors that affect the interaction include: 1) skill-biased technological change that raises the premium for more skilled workers (Mincer 1996; Katz and Murphy 1992); 2) economic globalization that causes shifts in product demand and employment toward skill-intensive sectors (Borjas and Ramey 1993; Krugman and Venables 1995; Feenstra and Hanson 2001; Wei and Wu 2001).

Since developed economies operate in the same world markets with similar technology, however, changes in demand move in broadly similar ways across countries. Supply changes will diverge more because different countries expanded their higher education systems at different times, but, even so, the proportion of the workforce that is highly educated has risen in all advanced countries. Difference in the pattern of change in supply and demand are thus unlikely by themselves to explain cross-country variation in changes in wage inequality fully (Freeman and Katz 1995). An empirical study finds that skill inequality explains only about 7% of the cross-country difference in inequality (Devroye and Freeman 2001). Furthermore, the dominant empirical investigation of rising inequality in developed countries continues to be single-country longitudinal studies based on labor market/human capital analysis, which suggests a problem of generalization across countries.

The second type of explanations focuses on wage-setting institutions, which suggests that the more centralized a wage-setting system, and the stronger the role of institutions in wage determination, the smaller will be the effect of shifts in supply and demand on relative wages, and, as a consequence, the greater will be their effect on relative employment (Blau and Kahn 1996; Card 1998; Bertola, Blau, and Kahn 2001). This paper reexamine whether and how much the wage-setting institutions affect wage differentials.

But those explanations, including “supply and demand of skills” explanations, have some problems in measuring the wage inequality. Most of the empirical studies on inequality derive from surveys focused on distribution of household income. Yet such data, especially Gini coefficient, only indirectly provide information about the distribution of wage rates. Furthermore, survey data that are comparable internationally through time is scarce and the quality of those that do exist is uneven in many cases (Galbraith and Berner 2001).

        The third type of studies about effects of government partisanship on economic difference seem to be grouped by three main question with which scholars are concerned: 1) Origins of political effects on different macroeconomic policies, such as electoral motivation (Nordhaus 1975), party difference (Hibbs 1977), and administration differences (Beck 1982); 2) the mechanism through which such influence is presumed to operate, such as fiscal policy (Lowery 1985) and labor organization (Garret and Lange 1989; 1996); and 3) roles of voters’ rational expectation (Chappell and Keech 1986) and forward-looking moderation (Alesina and Rosenthal 1989). Those studies all shed light on how and why government partisanship accounts for macroeconomic differences. Since their favorable dependent variables are often unemployment, GDP growth, and inflation, they leave untouched the question of the wage inequality or income distribution that this paper will explore.

3. Central Research Hypotheses.

1)  the more leftist participation in governments, the lower wage inequality.

        Following Hibbs’ intellectual tradition, this paper begins with a very simple understanding of government strategy. Governments can be expected to pursue partisan economic strategies consistently, because these further the interests of the governments’ core political constituencies (organized interests, activists, and voters)^[1]. Leftist governments are expected to intervene extensively in the economy to alter market outcomes and redistribute wealth and risk more evenly, which results in low wage differentials. Rightist governments are expected to pursue less-interventionist and promarket strategies that causes high wage differentials.