Introduction

Many scholars have observed that the politics of redistribution in the US is intertwined with the politics of race. Writing in the 1950s, Lipset and Bendix (1959) argued that the “social and economic cleavage” created by discrimination against blacks and Hispanics “diminishes the chances for the development of solidarity along class lines” (1959: 106). Myrdal (1960), Quadagno (1994) and, most recently, Gilens (1999) claim that racial animosity in the US is the single most important reason for the limited growth of welfare expenditures in the US relative to the nations of Western Europe. According to Quadagno (1994), political support for Johnson's War on Poverty was undermined by the racial conflicts that erupted over job training and housing programs. Alesina et al. (1999) find that localities in the US with high levels of racial fragmentation redistribute less and provide fewer public goods than localities that are racially homogeneous. Alesina and Glaeser (2004) conclude that racial conflict is one of the most important reasons for the low level of redistribution in the US compared to Europe.

The dominant approach in studies of race and redistributive politics in the US is to focus on the manner in which race affects voters' preferences regarding redistributive policies. Kinder and Sanders (1996) and Alesina and La Ferrara (2000) find that the sharpest contrast in preferences for redistributive policies in the US today is not between rich and poor or between men and women, but between whites and blacks.

Introduction

During recent years extensive research has centered on corporatist patterns of interest representation and centralized systems of collective bargaining. This research has associated corporatism and centralized bargaining with “labor quiescence,” to use David Cameron's (1984) label for the combination of low strike rates and wage restraint. Labor quiescence, in turn, is claimed to contribute to successful economic performance: lower rates of inflation and unemployment, higher rates of investment, and a less pronounced slowdown of growth following the oil crises of the 1970s.

Union cooperation with government policies to curb the growth of wages has been a central theme in the research on corporatism in Western Europe. In one of the first contributions to a burgeoning literature, Gerhard Lehmbruch (1977) observed: “Incomes policies appear to constitute a core domain of liberal corporatism” (96). Similarly, Leo Panitch (1977) argued that in “virtually every” corporatist society, policies “designed to abate the wage pressure of trade unions was the frontpiece of corporatist development” (74). Cross-national studies by Bruce Headey (1970) and Gary Marks (1986) have verified the existence of a close empirical relationship between union centralization and the successful implementation of voluntary incomes policies.

More recently, union centralization or corporatism has attracted the attention of economists seeking to account for the divergence in macroeconomic performance among advanced industrial societies since the mid-1970s.

The combination of private ownership of the instruments of production with representative political institutions based on widespread suffrage constitutes a compromise between workers, who consent to the private appropriation of profit by owners of capital, and capitalists, who accept the democratic institutions through which workers can make effective claims for an improvement of their material conditions.

This form of societal organization was considered to be inherently unstable by Marx, who believed that capitalist democracy is “only the political form of revolution of bourgeois society and not its conservative form of life,” (1934, p. 18) “only a spasmodic, exceptional state of things … impossible as the normal form of society.” (1972, p. 198) Once introduced, Marx thought, political democracy would either be extended to the “social realm” by workers nationalizing the means of production or subverted by capitalists using the ownership of capital to restore their political power. Yet in many countries, capitalist democracy has persisted over long periods of time.

Marx's predictions may have been false for at least two distinct reasons. His followers have tended to accept a model of conflict in which interests of classes are irreconcilably opposed to each other, a model that implies that workers should always be hostile to capitalism and capitalists. If this model is correct and if capitalism nevertheless survives in its democratic form, it must be the result of the activities of some institutions, typically thought to be the state, which provide physical repression, ideological domination, cooptation of workers' leaders, or whatever else is necessary to perpetuate capitalism in the face of the permanent threat posed by workers.

Ten years ago, when the volume Order and Conflict in Contemporary Capitalism (Goldthorpe 1984) was published, conventional academic wisdom regarding the future of trade unions and corporatism in western Europe was optimistic. As numerous contributors to that earlier volume emphasized, systems of industrial relations involving encompassing unions, in which authority was concentrated in either a small number of large industrial unions or in national confederations, had performed remarkably well in the decade after the first oil price shock of 1973. Most contributors to the Goldthorpe volume shared the view articulated by Peter Lange (1984) that unions could be thought of as playing an n-person prisoner's dilemma in which decentralized action among organizations resulted in collectively suboptimal outcomes. Unions would accept greater wage restraint collectively, the argument went, but not willingly concede acting individually. The prisoner's dilemma analogy suggested that the more encompassing the union movement, the greater the concentration among unions, and the more centralized the authority of the peak associations, the more likely it was that the collectively optimal cooperative solution could be obtained. David Cameron (1984), among others, provided support for this view with evidence showing that corporatism was associated with wage restraint and low strike rates, as well as with lower inflation and less unemployment than in noncorporatist OECD countries.

The concern with how the organizational features of trade unionism affect economic performance and the optimism about the relative merits of corporatism were premised on an important if often inexplicit assumption: that unions themselves would remain effective agents for the promotion of the economic interests of workers.

Introduction

The central dilemma of social democratic thought today concerns the promise and the threat of freer markets. In the social democratic view, markets are mechanisms that simultaneously generate an efficient allocation of resources and an inegalitarian distribution of rewards. Of course, market outcomes are efficient only under restrictive conditions that rule out externalities, significant increasing returns to scale, monopoly power, and so forth. Nevertheless, the current consensus on the advantages of freer markets in ever-broader realms that encompasses most of the political spectrum from Right to Left belies the qualifications of economic theory. It is relatively easy for parties without egalitarian commitments to embrace policies of market liberalization. Social democrats are more conflicted. In order to reap the efficiency gains that markets make possible, must social democrats abandon their traditional commitment to mitigating the inequalities of wealth and income that markets engender?

This paper addresses this general question in the context of the taxation of income from capital and the liberalization of financial markets. The increased international integration of financial markets is commonly perceived as one of the most important changes in the world economy over the past twenty years. Exports and imports of capital have grown at twice the rate of trade in goods since 1980. During the past decade, financial markets have been liberalized in Japan, Italy, France, New Zealand, Norway, Sweden and Denmark, i.e. in most of the advanced industrial societies that had significant regulatory controls over capital flows (OECD, 1989).

Introduction

Governments collect and spend on average around 45 percent of GDP in advanced industrial societies, and about half of government spending goes to fund the various expenditures on transfer payments and services that constitute what is commonly called the welfare state. Perhaps the most common view of welfare spending is that these policies are the outcome of a long political struggle in which workers and their allies used the power of the ballot box to obtain some redress for the inequalities generated by the market. In the words of Huber and Stephens: “The struggle of welfare states is a struggle of distribution, and thus the organizational power of those standing to benefit from redistribution, the working and lower middle classes, is crucial.” Other scholars have emphasized the political influence of the beneficiaries of welfare spending who are outside the labor market, such as the elderly. But whether the key groups are defined by class position, income, or age, most scholars have viewed welfare policies in redistributive terms.

The redistributive view of welfare policy, as formalized in a series of papers by Romer, Roberts, and Meltzer and Richard, implies that higher inequality of market incomes generates higher levels of political support for redistributive policies. The basic intuition is that low-income earners have more to gain and less to lose than do persons with high incomes from expansions of welfare spending. Thus, the poorer the majority of voters relative to the average income, the greater the expected support for welfare expenditures.

How do changes in the inequality of income affect political support for welfare policy? Starting with the economic models of Romer (1975), Roberts (1977), and Meltzer and Richard (1981), the conventional view is that increased inequality in pretax earnings leads to greater political demand for redistributive policies. The logic is simple and compelling. If the majority of the electorate receives a below-average income and if an increase in inequality causes above-average incomes to rise and below-average incomes to fall, then it is reasonable to think that demands for public policies to reduce the gap between rich and poor will increase.

The argument of Romer (1975) and Meltzer and Richard (1981) is best illustrated by comparing two hypothetical lognormal income distributions with the same mean but different levels of inequality as shown in Figure 1. As the figure shows, the greater the variance of a distribution like the lognormal distribution that is skewed to the right, the greater the gap between median and mean income. In the models of Romer (1975), Roberts (1977), and Meltzer and Richard (1981), political competition drives the level of welfare spending toward the ideal point of the median income voter. The greater the gap between the pretax earnings of the median income voter and average (mean) income, the greater is the level of spending preferred by the median income voter and the higher is the equilibrium level of welfare spending.

Few features of economic, social, or political life in industrialized democracies differ as much as the relative size of the trade union movement. The current density of union membership in the labor force ranges over almost the entire spectrum from above 90% in Sweden to under 20% in the United States (Goldfield 1987, 16). The level of unionization varies far more than such other characteristics of the labor force as the sectoral distribution of workers, the share of wages in GNP, rates of unemployment, or even the size of the public sector. Unionization rates vary more than such other forms of popular mobilization as electoral turnout or the share of the vote received by parties bearing communist, socialist, social democratic, or labor labels.

The economic effects of high levels of unionization are ambiguous. Unions that are large relative to the economy may simultaneously have more power in the labor market and more of an incentive to moderate their wage demands. A union that covers only a small fraction of an industry's work force, for example, can gain wage increases partly at the expense of employment among nonunion members, provided that union members have specialized skills not readily available elsewhere. In contrast, an industrial union covering the entire work force would be concerned with employment in all job categories. Bigger unions are not necessarily more militant unions (Cameron 1984; Olson 1982, chap. 4).

Introduction

Social democracy is, in essence, a series of political and economic compromises. Early social democrats were forced to compromise between their Marxist program and their commitment to abide by the rules of electoral competition that rendered the implementation of the Marxist program politically infeasible. Later, social democrats were forced to compromise between promoting the interests of their core constituency of manual workers in manufacturing, transportation, construction, and mining and the need to obtain support from much broader groups if they were to obtain a majority. Finally, social democracy represents a compromise between egalitarian goals and the need to promote economic growth and employment in a market economy driven by private investment.

Compromises are frequently unpopular. At the crest of left-wing mobilization in Europe and North America during the late 1960s and early 1970s, social democratic parties were denounced for having joined forces with their supposed class enemies in opposition to growing rank-and-file militancy. Defenders of social democracy on the Left responded by arguing that the apparent loss of social democracy's revolutionary aspirations was temporary. In the long run, a number of scholars argued, social democracy will be credited with creating the conditions that make the final transition from capitalism to socialism possible.

Today, the pendulum has swung the other way, and predictions of a radicalization of social democracy appear to be little more than wishful thinking. In the current climate, social democracy is charged with being already too radical for the good of the economy.

Introduction

There are large differences in the distribution of wages and salaries across advanced industrial societies and, in some countries, significant change over time in the recent past. In the United States, a worker who somehow managed to rise from the 10th decile of the wage distribution to the 90th decile would have received a pretax wage gain of 440 percent in 1990. To accomplish the same feat in 1980 would have taken a wage gain of only 380 percent. Both figures are in sharp contrast to the 98 percent increase that a Norwegian worker would obtain in going from the 10th to the 90th decile in the wage distribution in 1990. While countries may differ even more in the distribution of income from capital or transfer payments, the preponderance of labor earnings in total income is such that differences in the distribution of wages and salaries account for most of the cross-national variation in measures of the distribution of income among the nonelderly.

In the United States, the growth of wage inequality since 1980 blunted the usual impact of economic growth on poverty alleviation. The prolonged economic expansion that began in 1982 had little effect on the proportion of the US population with incomes below the poverty line until the mid 1990s, in sharp contrast to the significant declines in poverty that occurred during earlier economic expansions in the postwar period (Blank 1997).

Social democracy, it is often said, is nice but pricey. Whatever its merits in the rich countries of Western Europe, social democracy is frequently dismissed as an infeasible model for developing countries. Based on generosity towards the poor and protection against market competition, the argument goes, social democracy is only possible in consensual, homogeneous, and affluent societies with an extraordinary commitment to equality. In Third World countries that are conflict-ridden, heterogeneous, and poor, does the social democratic model have any relevance?

In this article we offer an agnostic view of the feasibility of the social democratic model of development in the Third World. First, we argue that consensus, homogeneity, and affluence are products of the social democratic model, not prerequisites. Second, we claim that the central social democratic policy in terms of economic development is the policy of wage compression attained through highly centralized wage-setting institutions.

Capitalism is a system in which many scarce resources are owned privately, and decisions about allocating them are a private prerogative. Democracy is a system through which people as citizens may express preferences about allocating resources that they do not privately own. Hence the perennial question of political theory and of practical politics concerns the competence of these two systems with regard to each other. Is it possible for governments to control a capitalist economy? In particular, is it possible to steer the economy against the interests and preferences of those who control productive wealth?

The central and only distinctive claim of Marxist political theory is that under capitalism all governments must respect and protect the essential claims of those who own the productive wealth of society. Capitalists are endowed with public power, power which no formal institutions can overcome (Luxemburg 1970; Pashukanis 1951). People may have political rights, they may vote, and governments may pursue popular mandates. But the effective capacity of any government to attain whatever are its goals is circumscribed by the public power of capital. The nature of political forces that come into office does not alter these limits, it is claimed, for they are structural – a characteristic of the system, not of the occupants of governmental positions nor of the winners of elections.

During the past 20 years Marxists have developed several theories to explain why all governments in capitalist societies are bound to act in the interests of capitalists.

Introduction

Unions are in big trouble, as everyone knows. Under attack by conservative politicians, battered by overseas competition, threatened by capital flight, bewildered by changes in the nature of work, and shackled by an outmoded egalitarian ideology, unions increasingly appear like large but aging dinosaurs struggling to adapt as the climate changes. The proportion of workers who belong to unions is in decline. Centralized systems of wage-setting are breaking apart. Incentive pay schemes and profit-sharing arrangements subvert negotiated wage scales. Wage inequality is growing while the median wage stagnates. Past achievements are under attack as European governments blame “labor market rigidities,” i.e. the legal and contractual protections that current workers enjoy, for persistently high unemployment. Even the unions' traditional political allies, the social democratic and labor parties, are keeping their distance, having discovered that being too closely tied to the unions is a political liability.

As is usually the case, what everyone knows to be true is not completely wrong but not completely right either. In this paper, we aim to describe, as precisely as the data allow, what is and is not known about the changing terrain of industrial relations in advanced industrial societies in the postwar period. We survey the empirical research that seeks to explain cross-national and longitudinal variation in union organization and wage-setting procedures. We do not attempt to provide country-by-country descriptions.