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Comparative European Politics, 2003, 1, (215–225) r 2003 Palgrave Macmillan Ltd 1472-4790/03 $25.00

r 2003 Palgrave Macmillan Ltd 1472-4790/03 $25.00 Review Same as it Never Was:


Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Mark Blyth

Department of Political Science, Johns Hopkins University, 338 Mergenthaler Hall, Baltimore, MD 21218, USA. E-mail:

Comparative European Politics (2003) 1, 215–225. doi:10.1057/palgrave.cep.6110008

Perhaps it is simply a generational artifact, but every 10 years or so certain positions in the field of comparative political economy become canonical. I suspect that The Varieties of Capitalism (VOC) literature will do exactly this in the coming decade, framing more research projects than any other perspective, and shaping the way that an entire cohort of graduate students thinks about growth, employment and the critical issues of institutional convergence and divergence in a globalized economy. While the contributions to this literature are many, three works stand out: Kitschelt et al. (2000), Iversen et al. (2000), and Hall and Soskice (2001). The first iteration of this literature by Kitschelt et al., offered us a macro- level model, where the proximate causes of domestic institutional transforma- tion are exogenous changes in the global economy, and since such changes were seen to be mediated by institutions with increasing returns, divergence among national economic models remain (Kitschelt et al., 2000). In this first version of the Varieties literature, the action lay very much in the macro. Exogenous changes refracted through different sets of institutions to produce particular regime clusterings. 1 The next iteration, Iversen et al. occupy a more meso level of analysis. For these authors, rather than simply intervening with external pressures in a passive way, certain meso-level variables, specifically; unions, employers and central banks, are seen as active agents that respond to external pressures. Thus, by focusing on the interaction of such agents, divergent national outcomes are explained. Yet, despite invoking different variables to those employed by Kitschelt et al. they come to the same conclusion — a ‘dual convergence’ thesis where Liberal Market Economies (LMEs) stand apart, and Coordinated Market Economies (CMEs), in general, converge on the German model (Iversen et al., 2000). Hall and Soskice, in turn, provide us with a micro-level analysis of the same phenomena, and in doing so they offer us, in many ways, the most theoretically

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism


rich and complex version of the VOC literature. For Hall and Soskice, the locus of action and the mechanism through which outcomes are best explained are firms. VOC seeks to ‘bring firms back into the center of analysis’, by focusing on the strategic interaction of firms and other actors in game theoretic terms. 2 Specifically, the responses of firms to five coordination problems determine a nation’s particular ‘variety of capitalism.’ These are: (i) how to coordinate bargaining with labor over wages and working conditions; (ii) how to secure suitable skills; (iii) how to respond to problems of corporate governance thereby gaining access to finance; (iv) how to deal with inter-firm cooperation and competition, especially over skills; and (v) how to overcome the problems of adverse selection in employment. These five key problems are seen as coordination problems because they are the product of strategic interaction in an institutional context that favors some strategies over others, and when they are resolved, there is seen to be a Pareto improvement over the initial position of the agents involved. In line with the economics of organization approach used, institutional capacities for policing, monitoring, and sanctioning labor and other product market partners, up to and including the state, become the critical variable in delineating regime type. Although deliberation and informal rules may ostensibly help here, the action is focused upon self-reinforcing institutional complimentarities that result in increasing returns. Thus, decisions taken in, for example, an LME, precisely because it is an LME, reinforces the selection of specific LME strategies over time (Hall and Soskice, 2001, 11). Thus, two distinct institutional clusters, LMEs and CMEs, are seen to be the outcome. Yet Hall and Soskice not only describe LMEs and CMEs as discrete equilibria as the other authors do, they also elaborate how such equilibria are stable and self-reinforcing by reference to the particular coordinative capacities of firms afforded by different institutional settings. Consequently, phenomena such as types of innovation strategy, the effectiveness of different types of public policies; and even the type of social policies that will be favored in each regime, become explicable in terms of particular institutional solutions to these five coordination problems. One can clearly see the strengths of this approach when taken as a whole. Micro, meso and macro are all there. The interactions of agents and institutions in their wider structural context is apparent, and how that context shapes those interactions is central to the approach. It has microfoundations meso institutions and macro regimes. It offers a coherent account of what we see empirically; that globalization did not change everything, that agency and institutions still matter, and that sustainable outcomes do look a lot like a choice between Germany and America. Given such comprehensiveness, is there room for critique? With such paradigmatic statements there always is. However, rather than simply make

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Was: Temporality and Typology in the Varieties of Capitalism 217 virtues into vices, I would rather


virtues into vices, I would rather point to tensions in this body of scholarship that are inevitable within the framework employed. Focusing my comments on the Hall and Soskice volume in particular, but referring to this body of work more generally, I divide my comments into three areas: what this literature is for; why the posited stable alternatives of LMEs and CMEs may be neither stable nor alternatives — at least as far as producing better economic outcomes is concerned — and finally, what a focus upon skills and the institutional dynamics of the manufacturing sector as a core focus of the VOC literature may obscure, as well as illuminate.

What is this Literature for?

Although Hall and Soskice say they do not wish to take a position with regard to which of their two identified equilibria is superior, they do in fact have an implicit preference, otherwise the VOC literature would merely be an a exercise in categorization (ibid., 21). After all, comparative institutional advantage — a key concept of the authors — is by definition, positional (ibid., 37). What this literature stands for is best expressed in Hall’s earlier observation that, ‘An old specter is haunting Europe: the specter of liberal orthodoxy’ (Hall, 2001). That orthodoxy stresses how European economic performance, especially regards employment, appears to lag behind the United States due to the inability of European labor markets to adjust to an exogenous shift in labor demand away from unskilled towards skilled workers (Johnson, 1997). European welfare states, it is argued, with their high reservation wages and replacement rates, discourage workers from upgrading their skills, thus leading to a labor-market demand and supply mismatch and consequent unemployment (Becker, 1996). In contrast to this orthodoxy, Hall argues that despite declining employment performance in Europe in the 1990s, ‘there are at least two viable ways of organizing a liberal capitalist economy;’ the LME and the CME (Hall and Soskice, 2000, 53). Implicitly then, Varieties of Capitalism argues for the CME alternative and thereby for the equalitarian distributions and outcomes typical of European political economies in the face of the neo-liberal onslaught. Or, to give it an old fashioned cast, for Social Democracy. This I fully applaud, and this is where I believe the first problem with this literature unavoidably crops up.

What if the Orthodox Critique of European Economies is Wrong?

Hall and Soskice rightly contest the hegemony of the orthodox model by pointing out another viable alternative. Yet, by contesting the fact of convergence to the American model in this way, they implicitly accept the evaluation of the model made by its partisans: that in the aggregate, ‘European’ political economies produce inferior outcomes, especially in terms

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism


of employment performance, and so an alternative must be found. Hall and Soskice offer a caveat: the German model is viable contender. Yet granting the validity of the self-congratulatory claims of the American model may create problems. Specifically, what happens to the claims made for these ostensible equilibria if European economic performance was never as bad as the conventional wisdom held? if Germany was never as stable as it was portrayed? and if American unemployment performance is not as admirable as its partisans portray? In such circumstances, the question ‘what is this literature for?’ comes back into sharp relief. For if none of the constants that make the comparison meaningful are constant, then what is ultimately being compared, and to what end? Let us examine each of these ‘what if’s’ in turn.

Was European Economic Performance as Bad as the Critics said?

As David Howell has recently shown, the case against European economic performance rests upon three assumptions. First, ‘that it is meaningful to speak about a European unemployment rate y [second, that] ythe underlying problem can be found in skill-based demand shifts against the less skilled, and third y [that] wage rigidities and job search disincentives imposed by welfare state institutions yare y responsible for high unemployment.’ (Howell, 2002, 206). The VOC literature seems to accept these points, yet when one looks at the data, the case for the orthodox interpretation seems rather under- whelming. First of all, European unemployment, once disaggregated, is an empty category. When seen across a 20-year period, US unemployment is sometimes lower, sometimes higher than European unemployment, and varies most with overall macroeconomic conditions. For example, ‘In the 1983–1988 period, Sweden, Norway, Switzerland and Austria had rates that were much closer to Japan (less than three per cent) than such close European neighbors as Denmark, France the Netherlands and Belgium (9–12per cent unemploy- ment.)’ (ibid.). In the 1989–1994 period, the same relationships hold. By 2001, six European countries had lower unemployment than the US, and at least two of those were paradigmatic welfare states (ibid., 206–207). In sum, ‘chronic’ European unemployment is either a statistical chimera or a function of period specific macroeconomic policies, both which have less than a direct relation to the institutional variables posited by the VOC literature. 3 Regarding the second and third criteria laid out above; unemployment as a function of skill shifts in the demand curve for labor and institutional rigidities, these points are also accepted by the VOC literature. After all, the CME’s vocational training system and consequent high-skill set is part of what sets it apart from other European countries and what makes it an attractive alternative model: it can adapt to this skill shift. 4 However, Howell also

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Was: Temporality and Typology in the Varieties of Capitalism 219 details how this concomitant explanation of


details how this concomitant explanation of unemployment is rather thwarted by the facts. Contrary to what the orthodox critique assumes, the relation of skills, wage structure and employment performance appear to run in exactly the direction opposite to that predicted by theory. For example, ‘Lower skilled workers in the United States have had y far higher unemployment rates relative to skilled workers than has been the case in yNorthern European nations’ (Howell, 2002, 209). If so, one can hardly blame European unemployment on rigidities in low-skill labor markets since no such institutional rigidities applied to unemployed low-skilled Americans. Again, as Howell puts it, ‘Wage flexibility should have protected low-skilled U.S. workers from relatively high unemployment,’ yet, looking at the data, it seems it did not (ibid., 210). Moreover, it is worth bearing in mind that ‘most countries suffering high unemployment in the 1980’s and 1990’s had these [allegedly] adverse institutions in the 1960’s, when unemployment was well below that of the United States’ (ibid., 212). As such, blaming these institutions seems somewhat off that mark. Taking these points together then, one must ask to what extent the European unemployment crisis is real, and therefore, apropos our discussion, to what extent there are only two possible institutional forms of capitalism that ‘deliver the goods.’

What if Germany is not the CME we want it to be?

If the seeming superiority of the American model is only that, then a further challenge to the VOC approach is to show that these two posited stable equilibria are in fact just that, stable equilibria. There are grounds for doubting this too. The concepts of institutional complementarity, feedback, increasing returns and the like all suggest a rather static and indeed functionalist picture. Indeed, some varieties of authors explicitly struggle with this. Kathleen Thelen’s contributions to this literature are signal in this regard. The tendency across all this literature is to regard Germany as the quintessential CME. However, such a stance is problematic if Germany itself is no longer Germany. Thelen offers a nuanced discussion of why German employers cannot bear to bring down the German model, based around two key points. First, if agents cannot have ranked priors, and hence preferences, over a set of institutions over which they have had no experience, then if employers are unsure of what their payoffs will be under new institutions, then they will probably cling to old ones (Thelen, 2000, 141–142, 157–158; 2001, 76–77, 83–85). However, a far stronger claim is that the reorganization of work wrought by German employers in the 1990 s has paradoxically handed the advantage back to labor; thus stabilizing the CME equilibrium in the face of deregulatory pressures. The introduction of ‘just in time’ production techniques has allowed labor to hold

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism


firms to ransom since the traditional weapon of the lock-out in such circumstances plays into labor’s hands. Given this, the balance of power has shifted decidedly and unexpectedly back to labor, thus halting deregulation (ibid. and Passim). Yet, Thelen also notes that German employers are increasingly defecting from those very organizations that makes the model what it is (Thelen, 2000, 164). Strategies such as ‘flexibilizing’ central contracts to the plant level may discourage employers exiting the whole bargaining system, but such actions are nonetheless transformative of the institutional mechanisms that make Germany a CME in the first place (Thelen, 2001, 83). Anke Hassel puts these transformations in much sharper focus. ‘Today, at the end of the 1990’s ythe pressures on the system to change are overwhelming. Employers increasingly resign from employers’ confederations or undercut — often illegally — terms and conditions provided for in collective agreements,’ (Hassel, 1999, 2). Indeed, the very institutions posited by the VOC literature to sustain the CME equilibrium; codetermination and training institutions, are disappearing from the scene. ‘In 1997, only 14.4 percent of West German and 12.3 percent of East German plants were covered by a valid collective agreement as well as a works council y[while] y46 percent of plants in the East had neither a works council or a collective agreement’ (ibid., 6). In the service sector the coverage figures are even lower. In 1994, 62.4 per cent of all firms had no plant level consultation mechanisms, and as a whole, these institutions are not being extended into the service sector where employment growth is at its highest (ibid., 2, 10). Similarly, the vocational training institutions, seen as key to the CME’s success, are, according to Hassel, ‘in severe crisis due to the reluctance of companies to take on trainees’ (ibid., 3). If this is the case, and if such institutions are those that make the CME what it is, then one must ask to what extent the Germany that exists is the one represented in the model? And if it is not, then what is this a viable model of?

What if America’s Success Really is not down to it Being an LME?

If actually existing Germany may not be the Germany that the VOC literature portrays, a parallel problem for maintaining the LME/CME distinction lies in the fact that America’s unemployment success (even as qualified above) may be due to factors wholly outside the LME model. Recall that the LMEs superior economic performance rests upon overcoming the five coordination problems Hall and Soskice detail. In the LME, this is achieved through hierarchically organized companies with transparent balance sheets and workers with general skills in deregulated markets rapidly responding to factor price, share price, and labor demand shifts. Leaving aside the issue of the stability of American corporate governance thrown up in the wake of the innumerable accounting

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Was: Temporality and Typology in the Varieties of Capitalism 221 scandals of the past year and


scandals of the past year and what this says about transparency and information as a governance devices, there may be a far simpler explanation the United States’ superior employment performance. The US jails large numbers of its unemployed. This is not as far fetched as it seems, and research by Bruce Western and Katherine Beckett backs this up. 5 Contrary to the image of the US as the quintessential LME whose unemployment performance is a function of free markets and flexibility, Western and Beckett argue that ‘criminal justice policy [in the US] provides a significant state intervention with profound effects on employment trends’ (Western and Beckett, 1999, 2). Specifically, with $91 billion dollars spent on courts, police and prisons in contrast to $41 billion on unemployment benefits since the early 1990s, the United States government generates ‘a sizeable non- market allocation of labor.’ 6 By 1993, 1,339,695 million people were incarcerated in the US, which gave the US an incarceration rate 519 inmates per 100,000. 7 In contrast, Germany’s incarceration rate in 1993 was 80 inmates per 100,000 (Western and Beckett, 1999, 35). Western and Beckett used Bureau of Justice Statistics data to recalculate US adult male employment performance by including the incarcerated in the total labor pool. They found that ‘in Europe, unemployed males outnumber male prison inmates between 20 and 50 to 1. In the United States the ratio of unemployed to incarcerated was less than 3 to 1’ (ibid., 12). Clearly, such a difference in the incarceration rate impacts the labor market since including the incarcerated in the unemployment calculation reveals the potential size of the labor market without this labor market intervention, and thus what adjusted unemployment would be. Western and Beckett argue that their recalculated series ‘shows that U.S. labor market inactivity never falls below 7% in the 1980’s’ (ibid., 13). Indeed, ‘if all inmates are included among the unemployed, labor utilization in Europe is higher for 15 of the 19 years of the 1976–1994 period’ (ibid., 14). The authors’ calculations reveal that in 1995, the official unemployment rate was 7.1 per cent for Germany and 5.6 per cent for the US. However, once recalculated to include inmates in both countries, German unemployment rises to 7.4 per cent while US unemployment rises to 7.5 per cent (ibid., Table 2, 37). Although these recalculations focus on the subset of adult male unemploy- ment and as such cannot account for the total variance in unemployment between the two states, such state intervention into the labor market ‘contributes to a falsely optimistic picture of U.S. labor market performance in comparison to Europe’ (ibid.,). The US, it seems, intervenes in labor markets just as much as European governments do, and this does indeed seem to improve unemployment performance, but going by this example, none of this has much to do with the institutions that make it an LME and that hypothetically give it superior performance. 8 In sum, if the three key

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism


assumptions that support the case for distinct varieties of capitalism; inferior European unemployment performance, superior American performance, and Germany as a distinct and stable alternative, are all questionable, one must question not just the stability of these hypothesized alternatives, but their very existence.

Explaining Stasis Amid Change: Skills and the Manufacturing Bias

All of which brings up two final points; the general focus on skills and what might be termed the concomitant ‘manufacturing bias’ in the VOC literature. Several authors in the VOC literature focus upon how skills are not only important to employers, they are in fact seen as the very key to future job growth and equality (see Estevez-Abe et al., 2001; Mares, 2001). This point may be fair enough, but pushed too far, this ‘supply side social democracy’ suffers from a latter day ‘Say’s Law’ problem — supply may not create its own demand. As Robin Varghese puts it, ‘One can debate y whether a different composition in the skill set of labor would mean more jobs using skilled labor, etc. But the fact remains that many jobs are not amenable to productivity increases and improvements as a result of raising the level of human capital y [since] yLabor productivity across the skills set increases as the capital–labor ratio increases, that is, as capital substitutes [for] labor’ (Varghese, 2001). Given this, it is little surprise then that employment growth is concentrated in the service sector since productivity increases in manufacturing are predicated on employing less labor, not more; something this approach seems to ignore and those in the 1960s, 1970s and 1980s, frightened of automation-induced unemployment, may have gotten partially right. The reasons for this are simple. First is a simple saturation effect: increase supply and price drops. However, more serious is the charge that skills per se may have little to do with employment outcomes. Again, Howell’s work is instructive in this regard. Citing research by Andrew Glyn, Howell argues that the orthodox theory of European unemployment discussed above would predict that the employment rate gap between skilled and unskilled workers should be greatest in states with the most labor market protections. In fact, ‘there seems to be little association across countries between unemployment rates by skill and the strength of labor market institutions’ (Howell, 2002, 212). Moreover, if skills are so important, especially in CMEs, then job growth, even in the service sector, should reward skills. Indeed it does, at least in part, but a simple quantitative fact overwhelms this. The US Bureau of Labor Statistics projections for job growth for 2000–2010 rank computer software engineers as the fastest growing occupation and predicts a 100 per cent increase in such jobs over the next decade. 9 In

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Was: Temporality and Typology in the Varieties of Capitalism 223 quantitative terms, 380,00 new skilled service


quantitative terms, 380,00 new skilled service jobs should be created. However, when one looks at the occupations with the largest job growth by volume one finds that while high-paid service sector jobs such as software engineers will total some 760,000 by 2010, food preparation and customer service representatives will account for 5,456,000 jobs over the same period. 10 As such, if skills increase with the capital–labor ratio, and job growth is concentrated in occupations where that ratio is the lowest, one must wonder what all these skilled workers are supposed to do when the service sector does not need their skills, and manufacturing reduces its overall labor demand in proportion to the skill input. As The Economist Magazine put it ‘the most believable forecast for 2020 suggests that manufacturing output in the developed countries will at least double, while manufacturing employment will shrink to 10–12% of the total workforce.’ 11 Paradoxically then, the German skills machine might be producing itself into oblivion as far as job creation is concerned. In short, more skills do not necessarily add up to more jobs, let alone better jobs. Finally, all of this points to a particular bias in the VOC literature as a whole where the focus upon the manufacturing sector, especially in the discussion of CMEs, is somehow representative of whole economy. Not one of the essays in any of the three volumes that constitute this literature deals directly with the service sector, and the identified institutions and processes that constitute these discrete equilibria seem much more constitutive of manufacturing than services. 12 In fairness, Hall does make the case that CMEs can produce service sector jobs that do not jeopardize equalitarian outcomes in another piece outside the Varieties volume (Hall, 2001). Hall posits three possibilities. First, that ‘the service sector yincludes business services ywhere many positions demand high skills and the productivity that can justify reasonably high wages’ (Hall, 2001, 72). Second, that by increasing the scope of public goods provision by the state, high service sector wages can be maintained. Third, that by cutting social security taxes, job growth can expand without altering wage distributions (ibid., see also Iversen and Wren, 1997). All of these are indeed possibilities, but they are ultimately possibilities within highly circumscribed limits. As noted above, unskilled service sector job growth quantitatively overwhelms skilled service sector job growth. Similarly, as Hall recognizes, the expansion of public goods and the cutting of social security taxes is limited by the available tax base. In an era when tax increases seems to be off the agenda of practically all political parties, such strategies seem inherently limited in scope (ibid., 73). While I am all for arguing for social democracy, doing so through a lens that ignores the fact that manufacturing needs less workers the more skilled they are, and that the majority of service occupations, a sector which constitutes

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism

Mark Blyth Same as it Never Was: Temporality and Typology in the Varieties of Capitalism


over 60 per cent of advanced country GDP, does not need skills, just workers, seems rather to miss the point. The issue of how to generate equalitarian outcomes in services is perhaps the single most important issue facing social democracies in the new millennium. Unfortunately, with its implicit acceptance of the orthodox theory of European unemployment, its attempt to ‘fix’ Germany the only alternative, and its skills and manufacturing bias, the VOC framework, offers only partial solutions for such a laudable and necessary project.


1 That is, Liberal Market Economies on the one hand and the tendency for National Coordinated Market Economies to converge upon Sectoral Coordinated Market Economies on the other. 2Although this use of game theory seems to be more metaphorical than actual since none of the contributions to the volume actually employ an extensive form game theoretic framework in their accounts.

3 The deflationary sado-monetarist bias of the ECB springs to mind here.

4 Indeed, for many of the VOC contributors, how skills are apportioned and produced by LMEs and CMEs is their defining feature.

5 Western, B. and Beckett, K. ‘How unregulated is the U.S. labor market? The penal system as a labor market institution’, Mimeo copy from Dr. Western’s Website at http://www.princeto- sociolog/faculty_directory/western_working_papers_online.html. This paper was also published as Western and Beckett (1999).

6 Ibid., p. 7. However, such differences cannot be attributed to simply a function of rising crime rates since crime rates have fallen while numbers jailed have increased.

7 Today, the Economist puts the US prison population in 2001 at 1, 931, 859, which does not include the 347,320 prison staff guarding these prisoners. Figures from The Economist, Pocket World in Figures 2002 (London: Economist Newspaper Ltd. 2001); and Statistical Abstract of the United States 2001 Table No. 380. If anything, the Western and Beckett study is underestimating hidden unemployment in the US.

8 Another example of this is James Galbraith’s estimation of US unemployment performance in the 1990s being a function of the introduction of the Earned Income Tax Credit (EITC), which acts as a wage subsidy for low-wage workers. Again, while plausible, this is a very un-LME policy that bears little relation to the institutional effects delineated by the VOC literature, which are supposedly constitutive of US employment performance. See Galbraith et al. (1999).

9 See BLS data on fastest growing occupations at 10 See BLS data on occupations with the largest job growth at


11 The Economist magazine, ‘The manufacturing paradox’, 15th September 2001. 12For example, patient capital, supervisory and codetermination boards, vocational training, peak bargaining, etc., are all far more common in the manufacturing than the service sector.


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