The Political Sources of Labor Market Dualism in Postindustrial Democracies, 1975-2011

Increases in wage inequality and atypical employment have occurred across postindustrial economies in recent decades. Technological change, globalization, the employment shift from manufacturing to services, and the decentralization of collective bargaining are commonly cited as causes. I argue that where social democratic parties govern, and where employers and labor remain highly organized, labor market dualism is mitigated. Not only should labor and employer organization directly suppress dualism, it should facilitate politically and organizationally egalitarian policy making and implementation by progressive governments. This should hold because the organizational scope, centralization, and policymaking integration of labor and capital blunts insider politics by sectorally fragmented actors and excessive rent seeking by narrow interest groups. I draw on 1975 to 2011 annual data from 18 postindustrial democracies and estimate models of active labor market policy, the social wage for labor market outsiders, wage inequality of full-time workers, and the employment share of involuntary part-time jobs. Higher levels of labor and employer organization are associated broadly with less dualism, and social democratic party government has significant egalitarian impacts on policies and outcomes at high levels of labor and of employer organization. Technological change, trade penetration by developing countries, and deindustrialization generate inegalitarian outcomes. Introduction The growth of household income inequality is a near universal phenomenon among postindustrial capitalist democracies. Increases in earnings inequality – driven by greater wage dispersion among full-time workers and rises in low-wage irregular employment – play a substantial role in this story (e.g., OECD 2008; 2011). Conventional social science theory places the blame at the door of postindustrialization. Technological change, globalization, the employment shift from manufacturing to services, trends in family structure, and the decline of centralized collective bargaining are commonly cited as the causes (see below). Yet, as Emmenegger et al (2012) note, the processes through which structural pressures are translated into policies and outcomes are political. Indeed, it is the central argument of this paper that political factors play central roles in shaping the rise in wage inequality and the bifurcation of the labor market into those in regular, protected jobs and workers in irregular, insecure employment. My argument is that where egalitarian social democratic parties govern, and where employers and labor are encompassing, centralized, and routinely participate in national policymaking forums, labor market dualism should be mitigated. While contested, the most persuasive theory suggests that the interests of low-wage regular and atypical workers are more likely to be protected where traditionally egalitarian social democratic parties rule. Yet, the changing realities surrounding feasible political coalitions in postindustrial societies suggest that the organization of labor and capital and the presence of cooperative institutions are crucial. Not I label workers in the lowest wage tiers of regular employment and irregular jobs 1 (disproportionately the low skilled, women, younger workers, and immigrants) “outsiders;” workers in middle and higher wage regular employment are called “insiders” (for a similar nomenclature, see, among others, Rueda 2007). I conventionally label this bifurcation of the labor market, “dualism,” and use the term as a synonym for inequalities in wages and job quality. 1 only should high levels of labor and employer organization have direct positive effects on outsiders’ interests, they should facilitate politically and organizationally egalitarian policy making and implementation by progressive governments. This should hold because the organizational scope, centralization, and policymaking integration of labor and capital blunts insider politics by sectorally fragmented actors and excessive rent seeking by narrow interest groups common to pluralist political economies. The paper is organized as follows. I first offer a brief overview of trends in labor market inequalities and the conventional theories that purport to explain the trends. I then elaborate my argument on the foundational role played by politics in shaping postindustrial labor market policies and outcomes. Next, I draw on 1975-to-2011 annual data from 18 nations and provide empirical analyses of the impacts of partisan government, the organization of labor and capital, and their interaction on wage inequality, atypical employment, and two dimensions of policy that should mitigate dualism, namely, active labor market programs (hereafter ALMP) and the social wage offered outsiders. I conclude by assessing the relative power of conventional theories and my own argument. An Overview of Labor Market Dualism and Its Causes I display two core dimensions of labor market outcomes in Table 1, namely, the earnings ratio of workers at the 90 and 10 percentiles of the wage distribution and the percentage of th th total employment accounted for by involuntary part-time jobs. The 90/10 ratio offers a useful, summary measure of wage dispersion. As the OECD (2011) has noted, both high-wage and lowwage workers have been moving away from the median earner in the majority of advanced economies and, thus, the 90/10 ratio offers a convenient summary indicator of trends. The