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 nega- tive, they do contend that existing arguments about the macroeconomic consequences of corpo- ratism 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 eco- nomic 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 interna- tional market competition.
PUBLIC SECTOR UNIONS, CORPORATISM, AND MACROECONOMIC PERFORMANCE
GEOFFREY GARRETT Yale University CHRISTOPHER WAY Cornell University
A
central tenet of the corporatism literature is that the Phillips curve trade-off between inflation and unemployment is mitigated in countries in which wage agreements are negotiated at the national level by powerful central trade union confederations (Cameron, 1984; Crouch, 1993; Korpi &Shalev, 1979). Most empirical studies, however, are based on data about labor market institutions that were gathered in the early 1970s and refer to
411 AUTHORS’ NOTE: An earlier version of this article was presented at the annual meeting of the Midwest Political Science Association, Chicago, April 6-8, 1995. We would like to thank the anonymous reviewers, Torben Iversen, Jonas Pontusson, Peter Swenson, and Michael Waller- stein for very helpful comments.
COMPARATIVE POLITICAL STUDIES, Vol. 32 No. 4, June 1999 411-434
© 1999 Sage Publications, Inc.
macroeconomic outcomes in the decade following the first Organization of Petroleum Exporting Countries (OPEC) oil shock in 1973. Recent case stud- ies, in contrast, suggest that the beneficial consequences of labor strength broke down during the 1980s in the Scandinavian countries in a cycle of strikes, inflation, and ultimately higher unemployment (Iversen, 1996;
Pontusson & Swenson, 1996; Thelen, 1993).
We argue that the mismatch between these two bodies of literature can be reconciled without abandoning the basic premise of corporatism about the potentially beneficial macroeconomic consequences of labor strength. Spe- cifically, we argue that one important reason for the apparent economic prob- lems of strong labor regimes in recent years has been the growth of public sector unions. We demonstrate that so long as public sector unions are not too strong (this limit is estimated empirically), corporatist institutions continue to promote both price stability and low rates of unemployment.
Encompassing labor movements—those that cover large sections of the workforce in a relatively small number of independent unions and in which authority is concentrated in the hands of leaders of a single trade union con- federation—do provide an organizational structure that is conducive to low inflation and low unemployment because they mitigate distributional con- flict among all workers. There is a limit, however, to the ability of encom- passing labor movements to perform this role. Where public sector unions are extremely strong (as has recently been the case in Scandinavia), powerful labor confederations cannot stop public sector workers from using their organizational power to bid up their wages to levels that have deleterious con- sequences for the private sector, especially those industries that are exposed to international trade.
This article relies on three recent systematic studies of labor movements in Organization for Economic Development and Cooperation (OECD) coun- tries that allow us to test the labor market institutions-performance nexus more precisely than has hitherto been the case. We use Visser’s (1991) data on public sector unions, Golden and Wallerstein’s (1995) analysis of the structural attributes of organized labor movements, and Traxler’s (1994) study of the coverage of collectively bargained wage contracts. These data sources allow us to construct more precise and time-sensitive measures of theoretically important attributes of labor movements than has hitherto been possible.
The interactive effects on inflation and unemployment of the encompass- ment of labor market institutions and the strength of public sector unions are then estimated empirically using panel data for 13 OECD countries at 5-year
intervals between 1970 and 1990.1Although differences in wage growth between the public and private sectors are the central intervening variable in our theoretical argument, it is not empirically possible to estimate the effects of encompassment and public sector union strength on these differences.
This is because reliable data on wages are only available for those in manu- facturing employment. Moreover, our argument depends on the difference between wage growth and productivity growth. It is impossible to get data on the productivity of the public sector. Thus, we are not able to test the full causal model, but rather, we must rely on the ultimate consequences of only the Encompassment × Public Sector Unions interaction for inflation and unemployment.
The remainder of this article is divided into four sections. Section 2 devel- ops the theoretical argument, Section 3 presents the data we used to opera- tionalize the encompassment of labor market institutions and the strength of public sector unions, Section 4 analyzes the interactive effects of these two variables on inflation and unemployment, and Section 5 discusses the impli- cations of this article by way of a conclusion.
CORPORATISM AND THE PUBLIC SECTOR
CHANGING CONCEPTIONS OF CORPORATISM
Much of the early work on corporatism posited a linear and positive rela- tionship between the power of trade unions and the centralization of wage setting on one hand and macroeconomic outcomes on the other (Cameron, 1984; Crouch, 1993; Korpi & Shalev, 1979). The basic claim of these studies is that the more the labor market is organized, the greater the incentives for union leaders to be concerned with the health of the national economy and the more likely will they be to restrain overall wage growth—to maintain high levels of total employment.
There are significant limitations to this argument. Notably, the simple cor- poratism thesis does not take seriously the basic insight of neoclassical eco- nomics that labor markets would function efficiently in the absence of trade unions altogether, resulting in both low inflation and low unemployment.
Organization into trade unions allows workers to push their wages above market clearing levels. Moreover, individual unions have strong incentives to
1. The countries are Australia, Austria, Canada, Finland, France, Germany, Japan, the Nether- lands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. This is the en- tire set of countries for which all the relevant data are available.
maximize the wages of their members today, even if this has negative exter- nalities for the economy as a whole (Olson, 1965).
The neoclassical and corporatist perspectives were integrated by Calmfors and Driffill (1988). They distinguish cases in which organized labor movements have the beneficial effects highlighted in the corporatism litera- ture from those in which union power has deleterious consequences for eco- nomic performance. Calmfors and Driffill argue that the relationship between labor market institutions and economic performance is “hump- shaped.” Three scenarios are considered with respect to the level at which most wage bargains are struck: in individual firms, at the industry level, or nationally.
First, Calmfors and Driffill (1988) argue that it is possible to generate low inflation and high levels of employment simultaneously in cases in which wage setting is predominantly at the firm level. This is because small and iso- lated groups of workers are not sufficiently strong to alter the market determi- nation of wages. Second, where wages are primarily set at the industrial level (i.e., labor market institutions are stronger on most indicators), wage push inflation will result—irrespective of the deleterious consequences of this behavior for overall levels of employment. In this case, union leaders can use their organizational power to increase the wages of their members, but they have little incentive to care about the negative externalities of this behavior.
Finally, Calmfors and Driffill argue that wage militancy will be mitigated by national-level wage bargaining arrangements. National union leaders have strong incentives to internalize the externalities associated with union power, using wage restraint today to improve the material well-being of all workers in the long run. In this final case, inflation and unemployment per- formance are expected to be just as good as in the case of the free labor market.
The Calmfors-Driffill hypothesis has been very influential. Their concen- tration on the level at which wage bargains are predominantly struck as the most important feature of labor market institutions, however, can be criti- cized. In a recent study, Golden (1993) argues convincingly that the internal structure of labor movements—and specifically the ability of central union leaders to coordinate the behavior of large sections of the workforce—is more important to explaining economic performance than the level of wage bargaining, per se. The reason for this is straightforward.
To be effective, centralized wage agreements must be adhered to at lower bargaining levels. But there are powerful incentives for groups of workers and their employers to free ride on central agreements with higher local wage settlements (“wage drift”). The concentration of union authority in peak con- federations whose constituents are spread throughout the economy mitigates
wage drift in two ways. First, the leaders of peak union confederations have strong incentives to coordinate wage restraint in all sectors (to increase the employment prospects of all workers). Second, they have the authority to sanction constituents that do not abide by such agreements.
As a result, one should expect in equilibrium that the presence of national wage agreements will covary with the encompassment of labor unions.
Nonetheless, central wage setting may be imposed in cases in which underly- ing structural conditions are inappropriate. In such cases, it is likely that the effectiveness of national agreements will be quickly undermined by wage drift at lower levels of collective bargaining.
In this article, we follow Golden’s (1993) lead and concentrate on the organization structure of labor movements rather than the level at which wages are set.2Nonetheless, the consequences for economic performance of variations in labor movement structure can be mapped directly from the Calmfors-Driffill hypothesis. Workers face a pervasive collective action problem. Maximizing wages is the objective of every worker. If all workers pursue this strategy, however, the collective outcome will be suboptimal.
Nominal wage increases will be eroded by higher economy-wide inflation, and unemployment will increase.
Inflation and unemployment performance can be expected to be good in cases that approximate free labor markets, in which unions are not strong enough to bid up wages above market clearing levels. When strong, individ- ual unions are numerous, do not cover large portions of the workforce, or are not subject to the authority of a single peak confederation, economic per- formance will be considerably worse because of the negative externalities of union militancy. Finally, where most of the workforce is covered by collec- tive bargaining agreements among a small number of unions and authority is concentrated in a single peak confederation, inflation and unemployment performance will be similar to that in the free labor market case because union leaders will internalize the externalities of wage increases.
Thus, the state of the theoretical art on labor market institutions concen- trates on their internal organizational characteristics and asserts that their relationship to macroeconomic performance is not linear but hump-shaped.
In recent years, however, the empirical veracity of this hypothesis has been questioned. Although the deleterious consequences of strong but
2. It also should be noted that it is extremely difficult to gather data that accurately reflects the effective level of wage setting in many countries (Golden & Wallerstein, 1995). As a result, empirical studies of the effects of wage setting levels, including that by Calmfors and Driffill (1988), rely on relatively crude indicators whose validity is hard to ascertain. For a recent effort to derive more precise measures of the centralization of wage setting, see Iversen (1996).
decentralized unions continue to be felt, the performance of some countries with relatively encompassing labor movements has deteriorated. As a result, it seems that today the relationship between labor market institutions and economic performance is indeed linear but negative. Contrary to the early corporatism literature, union power appears always to be bad for the economy.
In the remainder of this article, we take issue with this conclusion by dis- tinguishing between the effects of the strength of public sector unions on eco- nomic performance from those of the structural attributes of labor market institutions.
BRINGING IN THE PUBLIC SECTOR
Most existing analyses of the impact of labor market institutions on eco- nomic performance implicitly assume that the interests of all workers are the same. If this assumption were ever valid, it certainly has not been in recent years. Among other things, scholars have pointed to the destabilizing effects of increasing conflicts between unions in the sector of the economy exposed to international competition and those in sectors whose products are not traded (Iversen, 1996; Pontusson, 1992; Swenson, 1991; Wallerstein, 1995).3 The most important component of the nontradables sector is the public sector.4
The strategic calculus of workers in the public sector is very different from that of those employed in the exposed sector. Wage growth has immediate consequences for the welfare of workers in the exposed sector. International market conditions determine the price of goods and services. Thus, the com- petitiveness of national producers in international markets—and, in turn, employment—is a function of changes in labor costs relative to changes in productivity.5At a given world market price for a product, if workers push up their wages at a rate faster than their productivity increases, total employment in the firm or industry will decline.
3. Pontusson and Swenson (1996) argue that conflict between high- and low-value-added producers in the exposed sector put additional pressure on corporatism in the 1980s.
4. The relationship between the public sector and the portion of the economy insulated from international competition is not isomorphic. It is very difficult, however, to make judgments about precisely what is and what is not exposed to trade outside the public sector. Moreover, available data on the composition of trade unions is based on the distinctiveness of the public sec- tor. As a result, we assume that public sector unions are a good approximation for organized labor in the nontradables sector.
5. Assuming that other factors are constant, such as the exchange rate and supply-and- demand conditions in the international economy.
This relationship is much weaker in the public sector. There is nothing akin to a world market price for the bulk of public sector services. The pro- ducers of these services—governments—are essentially free to set the price for them. The proximate determinant of employment and wages in the public sector is government preference rather than global competitiveness. More- over, there are strong incentives for governments not to cut public sector jobs (or even to expand them) to prop up overall employment levels, especially in hard times. In so doing, governments can gain the short-term benefits from maintaining low rates of unemployment while putting off the costs until the future (through borrowing). In the long run, of course, higher government spending must be paid for with higher taxes. However, it does not appear that voters fully perceive this. Survey data consistently show that citizens want government to provide more services while lowering taxes.
The political economy of government service provision and employment creates powerful incentives for public sector workers to push up wages in the expectation that this will not adversely affect their employment pros- pects—certainly not in the short term. Instead, they expect that the costs of their wage militancy will be borne throughout society through larger budget deficits and higher inflation. The more extensively the public sector is union- ized, the more powerful should be upward wage pressures and the greater should be negative externalities of public sector militancy.
Exposed sector workers, in particular, will be adversely affected by wage militancy in the public sector because higher deficits and inflation will put upward pressures on interest rates and the exchange rate, decreasing the com- petitiveness of national products in international markets. Thus, one should expect the consequence of public sector union strength to be not only higher inflation but also higher unemployment in the exposed sector of the econ- omy. Moreover, if the government cannot create public sector jobs at the same rate that they are lost in the exposed sector, public sector unionism is likely to lead to greater unemployment in the economy as a whole.
THE INTERACTIVE EFFECTS OF PUBLIC SECTOR STRENGTH AND LABOR MARKET INSTITUTIONS
Up until now, we have discussed the macroeconomic effects of labor mar- ket institutions and the strength of public sector unions as if they are inde- pendent of each other.6In this subsection, however, we argue that the impact of labor market institutions on economic performance is likely to be condi- tional on the strength of public sector unions. One of the primary objectives
6. For an analysis of these independent effects, see Garrett and Way (1995).
of organized labor movements in open economies is to ensure that wage developments in the whole economy are compatible with promoting the competitiveness of the exposed sector.7This entails reining in wage militancy in nontradables and the public sector in particular.
Ceteris paribus, the more powerful are public sector unions, the more dif- ficult it will be for central labor confederations to ensure that the exposed sec- tor acts as the wage leader for the economy as a whole. What does this imply for the Calmfors-Driffill hypothesis?
Where public sector unions are very weak, the arguments made in the first subsection hold without modification. Hence, one should expect the hump- shaped relationship between labor organization encompassment and infla- tion and unemployment to obtain (see the weak public sector curve in Fig- ure 1). In this case, public sector unions have little impact on wage setting.
Workers in the exposed sector have incentives to push up wages, but these will be mitigated either by market forces where unions are very weak or by the discipline imposed by confederation leaders where unions are encom- passing. In intermediate cases, a spiral of wage push inflation and higher unemployment will be generated by the inability of powerful but decentral- ized unions to act collectively to lessen the negative externalities arising from wage militancy.
Figure 1. The effects of labor movement organization conditional on public sector union strength.
7. In Scandinavia, wage solidarity (equalizing wages across all segments of the workforce irrespective of their productivity, competitiveness, etc.) has also been an important goal of organized labor (Iversen, 1996; Moene & Wallerstein, 1993). But this has not been the case in other important examples of corporatist institutions, most notably in Germany and Austria.
As public sector unions become stronger, it becomes increasingly difficult for encompassing labor movements to coordinate the behavior of all their members. The hump-shaped relationship between labor organization and inflation can be expected to weaken, with the benefits of encompassing unions, in particular, becoming increasingly small (see the intermediate case in Figure 1). Where public sector unions are a significant presence in the economy, the objective of the leaders of labor confederations is to constrain public sector wage increases to levels that are compatible with the competi- tiveness of the exposed sector. It is only by constraining wages to such levels that union leaders can maximize the employment prospects and the real stan- dards of living for all workers. The more powerful are public sector unions, however, the greater their conflict of interests with those employed in the exposed sector and the more difficult it becomes for labor leaders to restrain public sector wage growth in the name of exposed sector competitiveness.
Indeed, at some threshold of public sector unions strength, the hump- shaped relationship should disappear entirely and be replaced by a linear association between labor encompassment and higher rates of inflation and higher unemployment (see the strong public sector case in Figure 1). The rea- son for this is that public sector unions become increasingly effective in lob- bying the central labor confederation to use its authority to push up public sector wages at the expense of exposed sector competitiveness (e.g., through a wage-leveling policy). In the long run, this strategy would be untenable for even the strongest public sector unions because there must be a limit to the willingness of governments to increase public sector employment to com- pensate for reduced competitiveness in the exposed sector. But in the short run, the notion that powerful public sector unions would use their power within central labor confederations to erode the competitiveness of the exposed sector is highly plausible (Wallerstein, 1995).
MEASURING THE ENCOMPASSMENT AND SECTORAL COMPOSITION OF LABOR MOVEMENTS
Most studies measure the encompassment of labor market institutions using some combination of union density (the proportion of unionized employees in the labor force) and qualitative codings of the internal organiza- tion of union movements that condense the last three decades or so into a sin- gle observation (Alvarez, Garrett, & Lange, 1991; Cameron, 1984). In recent years, however, three research projects have collected data that allow the con- struction of more precise measures of theoretically important attributes of labor market institutions.
First, Visser (1991) collected annual cross-national data on the size and composition of trade union membership for the period 1970-1989, including separate measures for public sector unions. Second, Golden and Wallerstein (1995) compiled data on the structural attributes of national labor move- ments, including the size and composition of union confederations at 5-year intervals from 1950 to 1990. Finally, Traxler (1994) gathered data on the por- tion of national labor forces covered by collective bargaining arrangements in 1990.
We have used these data to construct time-varying indicators for two fac- ets of national labor market institutions: the organizational capacity for col- lective action among the labor force as a whole and the strength of public sec- tor unions. The public sector variable expresses membership in public sector unions as a proportion of civilian employment.8
The organizational capacity variable consists of two elements designed to measure the encompassment of national labor movements. First, we use the coverage rate of collective bargaining to measure the portion of the labor force that is effectively organized by labor unions. This measure is preferable to the more conventional union density because in some countries—most notably France—a large portion of the labor force who are not formally union members are nonetheless covered by the terms and conditions of union con- tracts (Traxler, 1994).9
To measure the organizational capacity of labor for collective action, we use data on the distribution of union members across national-level confed- erations and the number of unions affiliated to those confederations. These two indicators tap interconfederal concentration and intraconfederal concen- tration, respectively.10 The interconfederation indicator is a Hirschman- Hirfandahl index:
interconfed= (confed unions)÷
∑
= 21 i
i
8. This measure was computed from Visser’s (1991) data on public sector union density and from Organization for Economic Development and Cooperation (OECD) figures (various) for public sector employment. Visser records a public sector union density figure only for 1985 in Canada and only for 1988 in Finland. We have extrapolated to the other time periods by assum- ing that the evolution of public sector density in Canada and Finland matched the average changes across other OECD countries. In the data analyses, we paid special attention to these countries to ensure that the results were robust to their exclusion.
9. The data for bargaining coverage rate are only for 1990. Furthermore, it should be noted that the coverage figures overstate bargaining coverage in Austria and Switzerland because Traxler (1994) excludes employees lacking collective bargaining rights. Because the bargaining rights of most public sector workers are restricted in Austria and Switzerland, the data overstates, for our purposes, the economy-wide influence of union bargaining in these countries.
10. These terms are those of Golden and Wallerstein (1995).
where confed is the membership if the ith confederation and unions is total union membership. The range of this measure is 0 to 1. A score of 1 could connote a union movement in which all members belonged to the same confederation (as was the case in Austria for the period under analysis in this article).
The number of affiliate unions in the main confederation provides the basis for the intraconfederation index. So that higher scores on this index indicate greater capacity for collective action (as is the case with higher scores for the interconfederation index and bargaining coverage), we based the intraconfederation measure on the inverse of the number of affiliates in the largest confederation. We then set the highest score in the data set equal to 1 and adjusted all other scores accordingly.
Table 1 presents data for the 13 countries for which we have data over the past two decades on interconfederal and intraconfederal concentration, the coverage rate of collective bargaining strength, and overall encompassment rank. For present purposes, there are two important points to be derived from these data. First, there is no evidence of a secular decline in confederation concentration from 1970 to 1990. With respect to interconfederation concen- tration, labor movements became increasingly fragmented in France, Can- ada, and Norway, whereas concentration increased in Australia, the Nether- lands, and Japan. But on balance, average interconfederal concentration in our sample of countries did not change appreciably from 1970 to 1990. Simi- larly, changes in intraconfederal concentration between 1970 and 1990 reveal no decline in labor’s capacity for collective action. There has been a steady decrease in the number of affiliate unions in nearly all countries in our sample. The number of affiliates has declined or remained constant in 11 of the countries, with only Japan and Switzerland experiencing increased frag- mentation on this measure.
The second thing to note from the table is that great cross-national varia- tions persist in the structure of labor movements. On both of our concentra- tion measures, Austria’s labor movement is far better equipped to act collec- tively than is Japan’s. Similarly, the variation in the coverage of collective bargaining in 1990 was great, with Austria again at the top of the table and the United States at the bottom. The final column of Table 1 illustrates these cross-national variations in 1990 with respect to an overall measure of encompassment. The rankings are based on an index reflecting equally the coverage and organizational facets of union movements.11
11. With all three components on a (0, 1) scale, the index consists of a weighted sum, with bargaining coverage receiving a weight of one half, whereas inter- and intraconfederation con- centration each receive a weight of one quarter.
Table 1
Measures of Concentration of Union Membership, Number of Affiliate Unions, and Coverage of Collective Bargaining Agreements Interconfederation Index (Intraconfederation Index)
Country 1970 1975 1980 1985 1990 Coverage Encompassment Rank
Australia .57 (.51) .57 (.55) .62 (.56) .81 (.56) .81 (.57) .80 4
Austria 1. (.94) 1. (.94) 1. (1) 1. (1) 1. (1) .98 1
Canada .54 (.14) .51 (.13) .42 (.17) .33 (.16) .35 (.17) .38 11
Finland .51 (.48) .51 (.54) .37 (.52) .41 (.54) .38 (.63) .95 3
France .30 (.51) .28 (.55) .24 (.56) .22 (.56) .22 (.57) .92 7
Germany .69 (.94) .72 (.94) .70 (.88) .70 (.88) .70 (.94) .90 2
Japan .18 (.24) .17 (.23) .18 (.30) .17 (.30) .39 (.19) .23 12
the Netherlands .24 (.75) .24 (1) .27 (1) .42 (.88) .56 (.88) .71 6
Norway .58 (.43) .51 (.43) .48 (.44) .43 (.44) .42 (.52) .75 8
Sweden .52 (.52) .50 (.60) .49 (.60) .47 (.63) .45 (.65) .83 5
Switzerland .34 (1) .32 (.94) .31 (1) .30 (1) .29 (.94) .53 9
United Kingdom .71 (.10) .74 (.14) .88 (.14) .83 (.17) .72 (.20) .47 10
United States .40 (.12) .40 (.13) .42 (.14) .59 (.16) .69 (.17) .18 13
Average .51 (.51) .50 (.55) .49 (.56) .51 (.56) .54 (.57) .66
Standard deviation .22 (.35) .23 (.36) .25 (.36) .25 (.34) .23 (.34) .28
Note: Data for the confederation indices are from Golden and Wallerstein (1995), except for Australia, which is from Deery and Plowman (1985); period aver- ages are entered for Australia and France for the intraconfederation index due to missing data. Data for the coverage of collective wage in 1990 are from Trax- ler (1994). Higher scores on all measures denote greater capacity for collective action in national labor movements as a whole. The encompassment rank is based on index scores for 1990 data (interconfederation×.25 + intraconfederation×.25 + coverage×.5).
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The encompassment rankings show important similarities with prior efforts to classify the internal organization of labor movements, but there are some significant differences as well (Cameron, 1984; Schmitter, 1981). Aus- tria, Germany, Australia, and Finland receive the highest scores on the encompassment index for 1990, whereas the United Kingdom, Japan, Can- ada, and the United States fill out the bottom of the list. Few would quibble with the ranking of Austria or Germany, but the placement of Finland is slightly more contentious because most studies of corporatism rank it as a borderline case. Australian labor market institutions changed considerably between the early 1970s and the late 1980s with the creation of national wage setting under the Accord process (Stilwell, 1986), a development that is con- sistent with its score on the index. Among the weak union countries, the American, British, and Canadian cases are unproblematic. Japan’s low rank can be faulted for ignoring informal coordination organized by business asso- ciations (Soskice, 1990), but this is true for any indicator based on the organi- zation of labor movements.
Finally, we rank Norway and Sweden in the middle of our sample. This is different from the conventional view of these cases as exemplars of encom- passing labor market institutions. The Golden and Wallerstein (1995) data make clear, however, that the concentration of unions in Norway and Sweden has always been lower than in Austria and Germany, among others, and that it has been declining since 1970. Moreover, this is consistent with recent case studies that describe a substantial breakdown in the capacity for collective action in the Swedish labor movement, in particular in the 1980s (Iversen, 1996; Pontusson & Swenson, 1996; Thelen, 1993).
In contrast with the relative stability of the organizational capacity of labor movements for collective action, Table 2 shows that the sectoral com- position of trade unions has changed considerably since 1970. The average strength of public sector unions increased up until 1985 and then stabilized.
Until 1980, much of the growth in these unions could be attributed to the expansion of public sector employment. Membership in public sector unions grew in the 1980s, however, even though public sector employment was rela- tively stable. This suggests that the propensity for workers to join unions in recent years has been higher in the public sector than in the private sector, per- haps reflecting the rapid growth in part-time work in the private sector (Traxler, 1994).
As was the case for encompassment, the data in Table 2 also reveal impor- tant cross-country differences in the evolution of public sector union strength. These unions grew very rapidly in Finland, Norway, and Sweden in
the 1970s and 1980s, a development we consider to have boded ill for the ability of these labor movements to act in ways that are conducive to eco- nomic competitiveness. In contrast, the size of public sector unions was quite stable in Austria, Germany, and the Netherlands. Finally, public sector unions retreated Australia, increasing the prospects for the behavior of all workers to have been coordinated in ways that are conducive to strong mac- roeconomic performance.
Taken as a whole, Tables 1 and 2 suggest that there were no great changes in the structural attributes of national trade union movements between 1970 and 1990. If the organizational structure of unions was conducive to corpora- tism in some countries in the 1970s, there is no reason to believe that this was not the case 20 years later. The sectoral composition of labor movements, however, did tilt considerably toward the public sector in many countries. We hypothesize that this change in the sectoral composition of power had pro- found consequences for the labor market institutions’ macroeconomic per- formance nexus.
Table 2
Public Sector Union Strength in 13 Countries, 1970-1990
Country 1970 1975 1980 1985 1990 Rank
Australia 15.4 16.6 16.7 16.9 14.3 4
Austria 12.6 13.6 14.0 13.4 13.5 5
Canada 12.7 11.6 11.3 12.3 11.2 7
Finland 13.8 16.4 18.6 22.6 24.3 2
France 12.6 12.9 9.3 6.5 5.5 11
Germany 9.1 9.5 9.4 9.8 9.2 9
Japan 6.3 6.4 6.0 4.9 4.5 13
the Netherlands 11.6 12.6 11.9 10.2 9.6 8
Norway 15.8 17.2 19.8 22.9 23.9 3
Sweden 15.6 18.8 22.9 30.1 32.2 1
Switzerland 6.9 6.5 6.5 6.8 6.9 10
United Kingdom 12.8 13.9 14.8 14.9 11.9 6
United States 4.8 4.6 5.3 5.1 5.2 12
Average 11.54 12.35 12.81 13.57 13.25
Standard deviation 3.65 4.49 5.59 7.77 8.53
Note: Calculated from data in Visser (1991) and the Organization for Economic Cooperation and Development (OECD) (various). Ranking calculated for the 1990 scores. Figures are for total public sector union membership as a percentage of civilian employment.
ENCOMPASSMENT, PUBLIC SECTOR UNIONS, AND ECONOMIC PERFORMANCE
METHODOLOGY
This section explores the interactive effects on inflation and unemploy- ment of the organizational structure of trade unions and their sectoral compo- sition. To evaluate the arguments laid out in Section 2, we analyzed panel data for 13 countries and five time periods. Because our labor market observations are at 5-year intervals from 1970 to 1990, we organized the economic per- formance data as 5-year averages centered around these observations: 1968- 1972, 1973-1977, 1978-1982, 1983-1987, and 1988-1992.
Analyzing data that pool time series for a number of countries creates spe- cial statistical problems for ordinary least squares (OLS) regression models (Sayrs, 1989). Specifically, OLS is vulnerable to heteroskedastic errors across units, unit- or time-specific effects, and autoregression within countries.
Nonetheless, relatively simple methods can avoid the problems inherent in pooled analysis. First, the use of panel-corrected standard errors—an exten- sion of White’s (1984) method for calculating heteroskedasticity-consistent standard errors to pooled data—ameliorates problems arising from hetero- skedastic errors (Beck & Katz, 1995). Second, the least squares dummy vari- able (LSDV) model deals with unit- and time-specific effects by assigning a dummy variable to each time period or country case. Finally, including a lagged dependent variable usually eliminates autocorrelated errors. These straightforward modifications allow an LSDV model with panel-corrected standard errors to yield efficient estimates of parameters and variances while avoiding the problems plaguing more complicated methods.
Interactive regression analysis facilitates the testing of the hypothesis that the effects of the structural attributes of labor market institutions on eco- nomic performance are contingent on public sector union strength. Because our hypotheses suggest interactions involving nonlinear relationships among continuous variables, we require a model in which the shape—not just the slope—of a curve changes as a result of interaction effects (Jaccard, Turrisi,
& Choi, 1990). To accomplish this, the moderator variable—in this case, public sector union strength—must be interacted with both the encompass- ment index and its square. This line of reasoning was tested by estimating the following equation:
Yit=αt+b1ENCit+b2ENCQit+b3PSit+b4(ENCit×PSit) +b5(ENCQit×PSit) +b6YLAGit+b7CBIit+b8NOBARGit
+b9OPENit+ eit
(1)
In this equation, ENC is the index of the encompassment of labor market institutions described in the last section, ENCSQ is the same index squared, and PS is our public sector union strength variable. We also included a number of control variables. YLAG is the lagged dependent variable.12CBI is Cukierman’s (1992) legal index of central bank independence (which would be expected to be negatively associated with inflation). NOBARG is a dummy variable for countries that restrict the right of public sector unions to bargain collectively (Japan, Austria, and Switzerland). We would expect inflation and unemployment to have been lower under these conditions. OPEN meas- ures the economy’s vulnerability to international economic conditions (exports plus imports as a share of gross domestic product [GDP] multiplied by the OECD growth rate). Higher scores on this variable should be associ- ated with lower inflation and unemployment. Finally, five period dummy variables were included.
If the results are consistent with our hypotheses, we would expect the fol- lowing pattern of coefficients for the variables that jointly operationalize the Encompassment×Public Sector Unions interaction: positive parameter esti- mates for ENC and PS, the ENCSQ coefficients should be negative, the terms for the ENC×PS interaction should be negative, and the terms for the ENCSQ
×PS interaction should be positive.
This pattern of results would produce the predicted nonlinear conditional relationships. Taking inflation as an example, very strong and very weak union movements would produce lower inflation, and moderately strong labor movements would produce higher inflation, but only when public sec- tor unions are weak. As public sector union strength increases, the ends of the hump-shaped curve would flatten out. To see this, Equation 1 can be rear- ranged as follows:
Yit=αt+β3PSit+ (β1+β4PSit) ENCit+ (β2+β5PSit) ENCQit +β6YLAGit+β7NOBARGit+β8CBIit+β9OPENit+ eit
(2)
The terms in parentheses represent the conditional coefficients for the encompassment index and its square. To illustrate, ifβ1is positive andβ4is negative, then the conditional coefficient for ENC is positive wheneverβ1>
(β4×PS). Similarly, whenβ2is negative andβ5is positive, then the condi- tional coefficient for ENCSQ is negative ifβ2> (β5×PS). With the expected signs, this implies that the hump-shaped relationship is more pronounced the weaker is the public sector. As PS increases, the interaction effect pushes the
12. For the first period, the value on the lagged dependent variable is average inflation or unemployment for 1965-1967.
conditional coefficients on ENC and ENCSQ in the opposite direction, damp- ening the hump-shaped curve.
RESULTS
Table 3 presents coefficients of the equations estimating the interactive models of inflation and unemployment. Because diagnostic tests indicated the presence of time-specific effects (but not country-specific ones), we included period dummy variables but did not use country dummy variables.13 Most of the control variables were appropriately signed and many of them
Table 3
Relationships Between Encompassment, Inflation, and Unemployment, Conditional on Public Sector Union Strength
Independent Variables Inflation Unemployment
Dependent Variable Lagged One Period 0.22 (0.21) 0.66*** (0.21)
1968 to 1972 –6.31 (4.30) –3.62 (2.49)
1973 to 1977 –2.30 (4.19) –2.97 (2.43)
1978 to 1982 –5.36 (4.04) –2.08 (2.34)
1983 to 1986 –8.66** (4.08) –1.38 (2.24)
1987 to 1990 –7.79* (4.27) –3.51 (2.20)
Vulnerability to OECD demand –0.03*** (0.01) –0.005 (0.003)
Central bank independence –2.61 (1.84) –2.05* (1.08)
No bargaining –1.39** (0.68) –2.50** (0.91)
Encompassment 53.56** (23.81) 26.23* (13.59)
Encompassment2 –50.20** (22.38) –22.11* (13.45)
Public sector union strength 127.09** (58.85) 86.37** (39.30) Encompassment×Public Sector
Union Strength –456.30** (219.56) –326.98** (151.90)
Encompassment2×Public Sector
Union Strength 414.56** (197.31) 265.63** (136.11)
Adjusted R2 0.71 0.86
N 65 65
Note: OECD = Organization for Economic Development and Cooperation. All entries are least squares dummy variable estimates with panel-corrected standard errors in parentheses. Inflation and standardized unemployment data are from the OECD.
*p < .10. **p < .05. ***p < .01.
13. F tests for time period effects clearly reject the null hypothesis of equal intercepts for dif- ferent points in time: for the inflation models, F(5, 51) = 28.9, p .001. Considering unit effects, on the other hand, F tests fail to reject the null hypothesis of equal constant terms: for the inflation data, F(12, 46) = 0.53, p = .88. This test is described by Greene (1993). It is worth noting that this is a joint significance test so that although any two of the period dummies may not appear to dif- fer significantly, the joint hypothesis that they are all equal is still strongly rejected. As with the inflation models, F tests for time period effects clearly reject the null hypothesis of equal inter-
were statistically significant. Perhaps most important, our dummy variable NOBARG, which captures the fact that public sector unions have few bargain- ing rights in Austria and Switzerland, was significant and negative in both equations. Thus, the remaining effects of public sector union strength are not artifacts of the bargaining environment.
Because the number of observations in our sample is relatively small (5
×13 = 65), special attention to the robustness of the estimating equation is warranted. To test for influential data points and outliers that might distort the regression coefficients, we computed DFITS statistics and studentized residuals. Comparing absolute values of DFITS to a cutoff point of 2 (k+1) / (n k− −1)(Chatterjee & Hadi, 1988) reveals just three potentially influential data points in the inflation equation and five in the unemployment model.14Similarly, studentized residuals outside the range |tit| < 2 are no more common than the approximately 5% of observations that we would expect to have relatively large residuals.15Deleting these potentially influential obser- vations had no significant impact on the results reported below.
The coefficients for the encompassment index and its squared term were both statistically significant and in the directions implied by the Calmfors- Driffill hypothesis. The public sector union strength variable had a positive coefficient and was statistically significant at the 5% level or better in both the inflation and unemployment equations. More important, and surprising given the high level of multicollinearity built into the estimate equation, all of the interaction variables were correctly signed and statistically significant in both the inflation and unemployment models.16The interaction term between public sector union strength and the encompassment index was negative,
cepts for different points in time: for the unemployment models, F(5, 51) = 13.75, p <.001. Con- sidering unit effects, on the other hand, F tests fail to reject the null hypothesis of equal constant terms: for the unemployment data, F(12, 46) = 1.38, p = .207.
14. For the inflation data, the observations with DFITS above the cutoff were the United Kingdom (1975), Japan (1980), and Germany (1975). For unemployment, the suspect observa- tions were the United States (1975), the United Kingdom (1985), the Netherlands (1985), Japan (1990), and Sweden (1985).
15. For the inflation models, 6.1% of the |tit| > = 2. For unemployment, the percentage is also 6.1%. Again, deletion of any or all of these observations did not substantially alter the results.
Regarding inflation, the potential outliers were the United Kingdom (1975), Germany (1975), Japan (1980), and Finland (1975). For unemployment, the questionable observations were the United States (1975), the United Kingdom (1985) and (1990), and Japan (1990).
16. Nonlinear interaction models inevitably feature multicollinearity by design as a conse- quence of the multiplicative terms. Although the resulting multicollinearity introduces inflated estimates of variances, it does not degrade the desirable properties of ordinary least squares esti- mates of coefficients (Fox, 1991; Jaccard, Turrisi, & Wan, 1990). Hence, the practical problem is that variance inflation makes it more difficult to obtain statistically significant estimates by stan- dard criteria.
whereas the interaction between encompassment squared and the public sec- tor variable was positive.
These results imply that the macroeconomic effects of the encompass- ment of labor are contingent on public sector union strength and that this interaction effect is nonlinear. This is demonstrated graphically in Figure 2 with respect to inflation.17Where public sector unions were very weak, the predicted level of inflation increased steadily with increasing encompass- ment to a peak just short of the mean within-sample value of the encompass- ment index, declining sharply thereafter.18 This produces the distinctive hump-shaped curve.
Unlike in a typical linear interaction model, where the slope changes as a function of the moderator variable, in our setup the shape of the conditional relationship also changed as public sector union strength increased. The curve was flatter where public sector unions were weak. Then, in the final two categories of stronger public sector unions, the curve flipped directions (and became U-shaped rather than hump-shaped). Higher scores on the encom- passment index were associated with higher inflation. Specifically, the slope of the right tail became positive and statistically significant when public sec- tor union membership was above 18% of the labor force, a percentage reached by Finland, Norway, and Sweden in the 1980s. Above this threshold,
Figure 2. The relationship between the encompassment of labor market institutions and inflation conditional on the strength of public sector unions.
17. The Y-axis plots predicted values for inflation at various levels of labor organization for the 1978-1982 time period, with the lagged variable set equal to the 1973-1977 mean. We only plot the curves for combinations of encompassment and public sector union strength found in our sample. We also restrict the plots to cases in which the conditional relationships were statisti- cally significant (p > .05) at both tails of the public sector union strength distribution.
18. In the chart and text, very weak public sector and very strong public sector refer to scores that are one standard deviation below and above, respectively, the mean value on the public union strength index. Weak and strong indicate scores one half of a standard deviation below and above, respectively, the mean value of the index.
increasing the encompassment of labor market institutions would have had deleterious consequences for inflation.
The magnitude of these effects was substantial. Where unions in the pub- lic sector were weak, an increase in the encompassment index from 0.6 to 0.8 would have decreased predicted inflation by 1.1%, in accord with the down- ward sloping right tail of the hump-shaped curve. Conversely, where public sector unions were very strong, the same increase in the encompassment of labor market institutions would have resulted in a 1.7% rise in predicted infla- tion. On the other end of the hump-shaped curve, when public sector unions were very weak, increasing the encompassment index from 0.3 to 0.5 would have increased inflation by 1.4%. But when public sector unions were very strong, the identical rise in encompassment would have yielded only a 0.1%
increase in inflation.
The unemployment model tells a similar story. Figure 3 plots the condi- tional relationships—at different levels of public sector union strength—
between the encompassment index and unemployment. Where public sector unions were very weak, the hump-shaped relationship between encompass- ment and unemployment was clear-cut. As with inflation, increasing public sector union strength pushed the tails of the curve upward, altering the shape of the relationship between labor organization and unemployment. Where public sector unions were strong, the curve straightened out and the relation- ship was not statistically significant. Finally, where public sector unions were very strong (again, organizing around 18% of the labor force), the slope on the right tail of the curve was positive and significant: The greater the encom- passment of labor market institutions, the higher was unemployment.
The influence of public sector union strength in moderating the relation- ship between encompassment and unemployment was substantial. For exam- ple, where the public sector was weak, an increase in the encompassment
Figure 3. The relationship between the encompassment of labor market institutions and unemployment conditional on the strength of public sector unions.
index from 0.6 to 0.8 would have cut predicted unemployment by 0.3%, in accord with the downward slope of the right tail of the hump-shaped curve.
Conversely, where the public sector was very strong, the same increase in encompassment would have led to a 0.5% rise in the predicted unemploy- ment rate. On the other end of the curve, increasing encompassment from 0.3 to 0.5 would have increased unemployment by 1.4% when the public sector was very weak. But when the public sector is strong, the identical rise in labor organization yields only a 0.9% decrease.
To sum up, the evidence presented in Table 3 offers strong support for our argument that the relationship between the encompassment of labor market institutions and economic performance is contingent on the strength of public sector unions. Where these unions are weak, a hump-shaped curve does describe the effects of encompassment on inflation and unemployment.
Where public sector unions are much stronger, however, increasing the encompassment of labor market institutions frequently leads to inflation and unemployment.
CONCLUSION
This article makes an important modification to the existing literature on the macroeconomic effects of labor market institutions. We have demon- strated that the effects of the structural attributes of national labor movements (the coverage of collective bargaining and the concentration of union author- ity) are contingent on the size of public sector unions. Most important, we have shown that the desirable macroeconomic effects of encompassing labor movements only obtain in cases in which public sector unions are weak.
Where these unions are much more powerful (organizing about 18% or more of the labor force), their influence within union confederations has deleteri- ous effects on the economy. In the extreme case, if public sector unions were to capture encompassing labor market institutions, they would use the organ- izational power of the labor movement to their own ends —undermining the competitiveness of the exposed sector.
Turning to the political economy of capitalist democracy in the 1980s, this suggests an important distinction between two sets of cases normally under- stood as corporatist, the Nordic countries on one hand and Austria and Ger- many on the other. Macroeconomic performance deteriorated sharply in the latter set of countries, and national institutions such as centralized wage set- ting with a wage solidarity norm fell by the wayside. We argue that one important cause of the breakdown of corporatist arrangements in these
countries was the rapid growth of public sector unions, to levels well above the 18% of the labor force threshold.
In contrast, there has been remarkable stability in the Austro-German variant of corporatism, in which the exposed sector acts as a wage leader for the economy as a whole, wage solidarity is not a primary objective of labor leaders, and inflation and unemployment performance continued to be rela- tively strong through the 1980s. Our interpretation of these outcomes is that the Austrian and German economies have continued to bear the fruits of hav- ing highly encompassing labor market institutions because public sector unions have not been strong enough to capture the labor movement for their own ends.
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Geoffrey Garrett is professor of political science at Yale University. He is author of Parti- san Politics in the Global Economy and numerous articles on the political economy of the advanced industrial democracies. His current research focuses on institutional develop- ment in the European Union and the effects of globalization on domestic politics.
Christopher Way is an assistant professor in the Government Department at Cornell University. His research on the politics of macroeconomics has produced several papers
on central bank independence, partisan theories of the macroeconomy, and labor or- ganization. His current research examines the link between electoral incentives and United States-Japan economic bargaining and explores the relationship between eco- nomic interdependence and military conflict.
