The eects of corporatist institutional structures on macroeconomic performance

Robin Tschtschel University of Vienna, Student Mat. 0321728 for Review by Lucio Baccaro University of Geneva October 30, 2011

1 Introduction
In this paper i will review some of the existing literature on the eects of corporatism on the macroeconomy. The theoretical and empirical ndings will be covered in a systematic way. The second section will provide the key concepts used by the authors. The third section will present theoretical and empiric arguments why and how macroeconomic performance is inuenced by the institutional structure of corporatism. There is a basic dierence in methodology: The model-oriented analysis by the economic literature, gaining its insights by game theory and comparative statics of equilibrium eects. This approach is often backed or justied by little empirical data and some non-formal arguments. A contrast is the more empirically-oriented literature provided by political science and economic sociology. Here, the theoretic argumentation is hardly ever backed by a formal model and used pirmarily to provide an explanation of the empirical ndings. These two dierent approaches show remarkably dierent results and i will try to highlight how these dierences arise. The fourth section will sum up the arguments and draw a conclusion.

2 Key Concepts
Macroeconomic Performance The eect on macroeconomic performance is analysed through three variables: Output (GDP), the employment/unemployment level and the ination rate. The Okun index is simply the sum of the later two but often argued to

be a better direct measure, since it is assumed that there is a (short-term-) trade-o between ination and unemployment.

2.1 Corporatism
There is no consensual view about what aspects of corporatism are most relevant to macroeconomic performance. In addition there is no consensual denition of the aspects, be they important or not. The following list is compiled by combining denitions from the literature: Bargaining Centralisation A combination of both horizontal (inter-organisation) and vertical (intra-organisation) coordination measurements, sometimes including regulation, coverage and other factors. Bargaining Governability An institutional property, relating to the extent that industrial conicts are resolved by the agreements reached at top-level. Can include legal regulation, hierarchical and authoritative structures in organisations. Interest Formation and Representation The process by which a) the interests of the organisations members are shape and b) these interests are aggregated and represented.

2.2 Wage Restraint

Wage restraint or wage moderation is seen as one of the main channels through which corporatism exerts its eect on macroeconomic performance. It is interpreted and operationalised in numerous ways although it always means a lower real wage in comparison to the unmoderated/unrestrained real wage. Denitions include the tax that has to be payed by lowering wage requests for the public good wage and price stability (Tarantelli, 1986) or the extent to that wages grow slower than technologically determined productivity increases (Baccaro and Simoni, 2010). That wage moderation has an impact on economic performance is assumed by most authors, although questioned by Baccaro and Simoni who focus on wage moderation and not on macroeconomic performance.

3 Analysis of the literature

That performance is dependent on the structure of corporatist institutionalisation through the internalisation of external eects is argued by Calmfors et al. (1988); Traxler and Kittel (2000); Gersbach (2003); Tarantelli (1986). Te strategic interaction of corporatist institutions and the government is the focus of Cubitt (1995); Soskice and Iversen (2000). How corporatist structures inuence interest representation is researched by Baccaro and Simoni (2010). That corporatism plays a role is formally argued by Cubitt (1995). He shows that a quantity-theory based macroeconomic model can be altered in a way that includes the eects of corporatism. In a game theoretic aggregate demand and supply model a large

union that is able to set the nominal wage is confronted with a government that sets the money supply. Both have a target function that is a weighted sum of the deviation from both a target price level and a target output, which they seek to minimise. The output targets of the two actors reect their preference in face of the employment/real wage trade-o and it is assumed that the government has a higher output goal.The eects of corporatism are considered in four aspects, i) the internalization of external eects the relative weight of the deviation from the price target in the unions target function ii) wage moderation - the level of the unions output target iii) consensus - the distance between the output targets of the union and the government iv) whether the game is played cooperatively or not. The analysis consists of three game-theoretic considerations: Noncooperative synchronous play, noncooperative play where the government acts rst and cooperative play. Comparative statics of the equilibrium eects show that a) both an increase in either the output target or the relative importance of the price target lower the price level and increase output and employment and b) consensus leads to lower price levels, in the case of synchronous play. Which variable - output or the price level - is stronger aected depends on the preferences of the government. If the government acts rst the results change in one aspect. The eect of an increase in the importance of the price target are now dependent on the weight the government puts on its price target. A cooperatively played game (a bargain) results in the achievement of the common price target and output depends on the relative bargaining strength (Cubitt, 1995). Although the model works under the strong restraints imposed by its paradigm it shows that both the preference for employment and the aversion to ination play an important role in the impact of corporatism on the economy. In addition both the employment level and the price level are aected by changes in the wage-setters preferences. How dierences in monetary rules aect the equilibrium rates of employment and output is the focus of an analysis by Soskice and Iversen (2000). In a neoclassical fashion the monetary authority pre-commits a rule which it will - after wages and prices are set adhere to. After the monetary rule is announced a small number of large unions sets the wages (unilaterally) in their respective sectors. Subsequently, under the assumption of Bertrand competition, the rms set their prices to cover the real wage they pay to their workers. Finally, the central bank increases the money supply in accordance with their rule and the increases in nominal money get distributed among the workers. The money is then used to demand the goods which will determine employment and the wage sum. Since all the steps after the wage-setting are predetermined, the unions can anticipate this development and set their wages in accordance with their members utility function. Thus the focus of the analysis is on how the monetary rule inuences union behaviour. Soskice and Iversen (2000) distinguish the monetary rules by their degree of accommodation. A fully accommodating monetary rule will set the money supply such that the real money in the economy stays xed - it increases the money supply as prices increase. If its less accommodating the price increases are not fully covered and the unions face a trade-o between the nominal wage they set and the real income (and thus demand and employment). The results are that a) for a given number of unions a decrease in accommodation increases employment b) if accommodation is given a decrease in the number

of unions increases employment c) if there is only one union the monetary rule doesnt matter d) for a fully accommodating rule the number of unions doesnt matter if its dierent from one (Soskice and Iversen, 2000). These are derived by doing comparative statics of the equilibrium that results from the game the unions play against each other. These considerations show one of the mechanisms that may cause the wanted internalisation of the external eects: The increased ability of the central bank to force the unions into wage restraint by threatening to cause a recession. This would suppress demand and thus employment which will ultimately go against the unions goal. But the assumptions of the model both implicit and explicit are numerous. Soskice and Iversen (2000) states i) rational expectations ii) perfect competition in the goods market (but not in the labor market) iii) central bank credibility iv) complete information and v) absence of nominal rigidities as the essentials. Soskice and Iversen (2000) show long-run average unemployment rates against a combination of a monetary rule (accommodating or not) using central bank independence as a proxy and the degree of centralisation at three levels (which includes horizontal coordination to some extent). But they themselves admit that it is literally only illustrative. In contradiction to the theory Baccaro and Simoni (2010) nd that there is no impact of central bank independence. They even state in a footnote that they tested the interaction between central bank independence and coordination, which was insignicant too. The notion that market forces may be the crucial factor in causing the wage setters to internalise the negative eects of their behaviour and exercise wage restraint is supported by Calmfors et al. (1988). He examines the inter-dependence of the bargaining system and the industrial structure by use a model of an economy with 64 industries, grouped at dierent levels. At the lowest level four industries form a group, at higher levels two groups constitute one super-group. For each level there is a rate of substitution, derived from consumers utility functions. This structure is argued to reect the real-world in the following sense: The four-industry groups produce products that are quite alike and thus consumers choose between them at the given rate. But substitution between the products of two groups may happen at a dierent rate as butter and margarine are closer substitutes than food and cars (Calmfors et al., 1988). At the lowest level of union centralisation one union covers each industry. Unions merge only in their respective groups (and do so simultaneously) and consequently supergroups resulting in six degrees of centralisation: 64, 16, eight, four, two and one union. The argument is that unions have larger incentive to cooperate if their goods are close substitutes and this pattern conforms with observations (Calmfors et al., 1988). Three meta-cases are considered: Unions that can set the nominal wage uni-laterally, wage bargaining with employers associations that follow the same centralisation pattern and nally a model where unions again set the wages but have to take the tax rate (which exclusively nances unemployment benets) into account. The results depend on the values of the ve dierent rates of substitution and are qualitatively independent of the meta-cases. A special case are equal rates of substitution for all levels of grouping (which means that demand for all other goods increases equally if one price increases). This parametrisation will result in falling wages and unemployment as the number of unions decreases. If intra-group rates of substitution are

higher than inter-group (and higher for lower levels of grouping) the model shows the so called hump-shape. If centralisation is low unions are forced to exercise restraint by fear of unemployment in their industry caused by substitution eects. As it increases this trade-o becomes less important but if high enough the unions are faced with the fact that they will cause price hikes if they dont exercise restraint, thus lowering their real wage. The eects are more pronounced the stronger the dierences in substitution rates are and the humps shape depends on where the dierences between levels are large or low (Calmfors et al., 1988). The model by Calmfors et al. (1988) again has serious limitations. There is no central bank, demand is exogenously given, perfect product market competition, etc. They do rank correlations between an index of centralisation they constructed and indexes of macroeconomic performance indicators. They show that there are high correlations between the and the change in the variables (change in 10-year averages). Traxler and Kittel (2000) claim that Calmfors and Drill rank countries falsely by standards of their own operationalization. They test the theory themselves and show explicitly that there is no signicant eect associated with the ranking provided by Calmfors et al. (1988). Baccaro and Simoni (2010) show that wage-bargaining centralisation (in a dierent operationalisation) does play a role, but the eects are smaller than that of coordination. In addition the measures are highly correlated which indicates that they may actually come hand in hand. This criticism of the emphasis on bargaining centralisation can be illustrated by examining the theoretic reasoning in regard to the four aspects dened in Section 2. Bargaining governability and coverage are assumed to be realised fully. Interest formation is done exogenously (by constant preferences) and there is no representation problem as all union members are the same. Thus bargaining centralisation is the only factor considered as a variable but vertical coordination is given by assumptions and the market is the only force able to provide horizontal coordination. In summary, the analysis looks at one factor of one aspect of the phenomenon, but claims to look at the eects of corporatism itself. Gersbach (2003) uses a game theoretic model of a two-sectoral economy where both sectors are unionised and bargain with their employers. In this setting he shows that the outcomes depend on the degree of farsightedness on behalf of the unions. Thus even for a given degree of centralisation, outcomes may vary and depend on other factors. That corporatism does not automatically come with centralisation is argued by Traxler and Kittel (2000) and Baccaro and Simoni (2010). Their focus is on the interaction of coordination (of which centralisation may be one factor) and the other aspects of corporatism. Horizontal coordination in combination with a means to ensure vertical coordination is found to be the key explanation of wage moderation by Traxler and Kittel. They show that with higher horizontal coordination comes either militancy or moderation dependent on bargaining governability. Specic forms of horizontal coordination may not need a high degree of governability because bargaining takes place at lower levels (eg. patternbargaining). With no coordination there is no need for governability but the outcome is not clear although tendency goes towards an intermediate performance. These theoretic

argumentation is supported by an econometric analysis. In comparison to state-imposed coordination the eects of dierent coordination mechanisms are examined. Nominal labor costs, unit labor costs and macroeconomic performance indicators show dierent reactions under the condition of low or high governability (Traxler and Kittel, 2000). Tarantelli (1986) can be interpreted in a similar way. By means of linear regression analysis he is able to show that corporatism lowers the Okun index in the period 19681983 and the eect of corporatism increased in the aftermath of the oil crises (1973 and 1979). Baccaro and Simoni (2010) argue that it is not governability that matters the most but that union democracy is the needed feature. They explicitly focus on the eects of contract ratication as an operationalisation of union democracy. Thus, the interest formation and representation process is at the centre of their examination. They do cross-sectional time-series analysis of 16 OECD countries. The dependent variable is wage growth in eciency units which controls for changes in productivity induced by wage militancy (Baccaro and Simoni, 2010). They control for numerous macroeconomic variables and provide numerous robustness and specication tests which result in a support of their main hypothesis. The results are qualied in the context of historic developments and it is shown (by tests for interactions and time trends) that contract ratication has become signicantly important in the (late) 1980s and increasingly thereafter.

4 Summary & Conclusions

In my opinion the results that have to be drawn from the literature that forms the basis of this paper are as follows: The eects of corporatism on ination are well supported both theoretically and empirically. Some theoretical models suggest that there is a direct eect on unemployment as well but the econometric analysis examined here does not support this hypothesis. Corporatism seems to inuence the economy through the eects of wage moderation. Other mechanisms exist, but are not at the focus of the present literature. How wage moderation is achieved is the core of the debate presented in this paper. The formal, theoretical work indicates a certain hump-shape: Corporatism has negative eects on performance at as centralisation increases, but once a certain point is reached, more centralisation may result in better performance again. But these results can be explained by the paradigmatic assumptions of their theoretical surrounding and have little empiric backing. Empirical evidence suggests a dierent result. Wage moderation is achieved by coordination (inter- and intra-organisational). But it needs combination with another aspect of corporatism: A high degree of governability of the organisational structure or a high degree of democratisation for the periods before and after 1990, respectively. As far as other mechanisms of corporatism are concerned the present literature does support drawing conclusions. Further review of work focused on other eects (Landesmann and Vartiainen, 1992, e.g.) may provide further insights. If unemployment and other performance indicators are always positively aected by wage moderation is another issue. Review of the post-keynesian literature on productivity and growth regimes

may be useful (Hein and Tarassow, 2010, e.g.). In addition the data presented by the literature could be used to examine the eects of corporatism on the response parameters to exogenous shocks.

References
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