Political Parties and Economic Policy in Industrialized Democracies : An Insider-Outsider Partisanship Model

This paper presents an argument that rejects the conception of labor as a unitary political actor and the identification of social democratic governments as those that will promote the interests of labor. I divide labor into insiders, who enjoy employment protection, and outsiders, who do not, and reconceptualize electorally influential groups and their main policy interests accordingly. I first use some Eurobarometer data to show that my partisanship model’s assumptions about the preferences of insiders, outsiders and upscale groups are accurate. I then present a set of hypotheses regarding the effects of partisan differences on economic policies and test them in a pooled cross-section time-series analysis. The insider-outsider model explains why government partisanship influences some economic policies (those affecting employment protection) but not others (either anti-unemployment or anti-inflation ones). My results challenge previous findings relating partisanship differences to economic policies (as in works by Boix, Esping-Andersen and Garrett and Lange) and call into question the appropriateness of Alesina and Roubini’s rational partisanship model when analyzing OECD countries. 1 In the literature on the comparative political economy of advanced democracies there has been a widespread theoretical consensus about the goals different political parties have when in power. At least in principle, social democratic governments are assumed to defend the interests of labor and conservative ones those of what some authors have defined as the “upscale groups. ” Yet, since the early 1970s, many analysts have observed the coexistence of high levels of unemployment and social democratic government as well as a decrease in the distinctiveness of some of the economic policies traditionally associated with different political parties. I argue that identifying social democratic governments with low unemployment policies and conservative ones with low inflation policies is not productive. This identification is based on the assumption that labor is disproportionately affected by unemployment while it is disproportionately unaffected by inflation. For reasons that will become clear in the following pages, I maintain that when analyzing economic policy in the post-1973 period, this assumption is inaccurate. The main thrust of my analysis is that labor is divided into those with secure employment and those without. I argue that the electoral goals of social democratic parties are best served by pursuing policies that benefit those enjoying secure employment while ignoring the interests of the unemployed and precariously employed. The evidence that I present challenges three influential interpretations of the political economy of advanced democracies. First, it contradicts the conclusions of the traditional partisanship arguments that maintain that social democratic governments will promote the interests of labor—including the unemployed and precariously employed (see, for example, Hibbs 1987a, Alt 1985 and Garrett and Lange 1991). More specifically, my results question the relationship between social democracy and policies directed to increase the skills of the unemployed and precariously employed found by Boix (1998). They also put into doubt the generally accepted assumption that the Scandinavian model rests on the influence of social democratic governments over active labor market policies. Second, the model that I propose challenges one fundamental aspect of Esping-Andersen’s (1990) seminal analysis of the welfare state: that the pursuit of employment protection is the identifying characteristic of christian democratic parties, specially in continental Europe. And third, my findings dispute the appropriateness of Alesina and Roubini’s (1997) rational partisanship model when examining OECD countries. I argue that the insideroutsider model represents a better option when trying to understand the relationship between partisanship and policy since the early 1970s. 2 In the next sections, I will first describe the partisanship model I propose and place it within the existing literature. I will also provide some preliminary evidence that validates my partisanship model’s expectations about the preferences of insiders, outsiders and upscale groups. I will then present this paper’s core analysis showing that the effects of partisanship on economic policy are indeed the ones predicted by the model. The paper finally concludes with some observations about the implications of the insideroutsider model. The Insider-Outsider Partisanship Model Like much of the literature that explores the relationship between partisan government and economic policy, I understand political parties to be organizations of politicians who have their own interests as well as commitments to ideology and to particular groups of voters. Like Garrett and Lange, I assume that “while all governments would prefer, ceteris paribus, to pursue their partisan preferences, they will only do so if this does not prejudice their prospects for reelection” (1991: 543). Economic policy is then considered an instrument that molds public support and helps construct the electoral coalitions on which political parties depend (Przeworski and Sprague 1986: 125-6). Unlike most of the comparative political economy literature, I do not conceptualize labor as a homogeneous political actor. My analysis is based on two propositions: that labor is divided into insiders and outsiders, and that the interests of insiders and outsiders are fundamentally different. Insiders are defined as those workers with highly protected jobs. Several factors contribute to the level of protection that characterizes “insiderness:” a company’s firing and job search costs; insiders’ production-process skills and attained levels of company investment; the nature of employment protection legislation; and the behavior of unions. Insiders are sufficiently protected by the level of security in their jobs not to feel greatly threatened by increases in unemployment. Many insiders, furthermore, are assumed to be concerned about rising prices. Outsiders, on the other hand, are either unemployed or hold jobs characterized by low levels of protection and employment rights, lower salaries, and precarious levels of 1 There are two analytical frameworks that directly influence the model that I propose. There is first the work of authors like Piore (1969), Doeringer and Piore (1971) and Berger and Piore (1980) on dual labor markets and an economic insider-outsider approach that emphasizes the differences between the employed and the unemployed (see Blanchard and Summers 1986, Lindbeck and Snower 1988 and 1990, and Lindbeck 1993). My analysis introduces partisan politics into a redefined insider-outsider framework (something that even authors like Saint-Paul, see 1996 and 1997, have not done). 3 benefits and social security regulations. I consider the unemployed, the involuntary fixed-term employed and the involuntary part-time employed to be outsiders. The interests of these two groups are fundamentally different and, in some circumstances, contradictory. Insiders care about their own job security and inflation much more than about the unemployment of outsiders. Outsiders, on the other hand, care about unemployment and job precariousness much more than about inflation or the employment protection of insiders. Reducing the levels of “insiderness” so that more jobs are available for the unemployed and a lower level of precariousness is attained by part-timers and temporary workers is a positive outcome for outsiders. While dividing labor into insiders and outsiders could be considered to have some precedents in both the economics and political science literature, trying to integrate this division into a coherent conception of partisanship and exploring its possible effects on economic policy represents a new endeavor. Distinguishing between insiders and outsiders supports the following reconceptualization of electorally influential groups and their main policy interests: (1) there are upscale groups (which generally include management and the upper middle class) and their main interest is low inflation, (2) there are insiders and their main interest is job protection, and (3) there are outsiders and their main interest is lower unemployment and job precariousness. In this stylized framework, both kinds of political parties are considered to have a core constituency and a more general target they wish to attract to obtain a winning and stable electoral coalition. It is my contention that social democratic parties have strong incentives to consider insiders their core constituency. There are historical and ideological reasons for this but there is also the important fact that outsiders tend to be less politically active and electorally relevant (as well as less economically independent) than insiders. The main policy objective of social democratic parties will therefore be the continuation or increase of job security. At the same time, social democratic parties will attempt to develop more encompassing electoral coalitions in two ways. First, social democratic policy-makers feel that it is electorally attractive to design strategies directed to control inflation. This is the case because low inflation policies appeal to upscale voters as well as to the social democratic core constituency (since many insiders 2 In relation to the involuntary nature of precarious work, most analysts agree that the majority of workers holding fixed-term contracts in the OECD do so involuntarily. It is often argued that some part-time workers, in particular women, are voluntary ones but, as Maier (1994: 180) points out, the fact that many working women do not want to work full-time does not imply that they prefer part-time jobs with precarious levels of protection and benefits. 4 are concerned about inflation). Second, social democrats believe t