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Equality, Employment, and Budgetary Restraint: The Trilemma of the Service Economy Author(s): Torben Iversen and Anne Wren Reviewed work(s): Source: World Politics, Vol. 50, No. 4 (Jul., 1998), pp. 507-546 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/25054055 . Accessed: 03/03/2013 14:29
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EQUALITY, EMPLOYMENT, AND BUDGETARY RESTRAINT

The Trilemma of the Service Economy
ByTORBEN IVERSEN andANNE WREN*
Introduction two decades since the late 1970s have seen significant changes
structure of advanced democratic societies. Com THE in the economic or tripled with the the 1960s of level has doubled pared unemployment in many tighter cope with to the capacity of governments of the public sector. these problems through expansion new to this The dominant load" and approach explaining "problem to cope with the failure of governments it has been to look for causes in reduced countries, inequality have fiscal constraints has risen dramatically in others, and
the global economy. Thus, of capital mar (1) the internationalization in the macroeconomic for a reduction kets has been blamed steering invest levels of transnational of (2) Growing governments.1 capacities ment have been seen to the structural power of capital and strengthen undermine economic the capacity policies.2 And of governments (3) greater countries dispersion to pursue distinct social and to exposure competition low-wage a univer has been said to produce and/or unemployment.3
from newly industrializing sal rise in the level of wage

*An earlier version
of the American Political As of this paper was presented at the annual meeting like to thank Alberto Alesina, 1, 1996. We would sociation, San Francisco, August 29-September Thomas Cusack, Jorge Dominguez, Geoffrey Garrett, Andrew Glyn, Peter Hall, Paul Pierson, Jonas and Kathleen Thelen for many helpful David Soskice, John Stephens, Peter Swenson, Pontusson, comments. Both authors gratefully financial support from theWissenschaftszentrum acknowledge also gratefully acknowledges Berlin. Anne Wren financial support from the Program for the Study of and the Social Science Re and Europe, Center for European Studies, Harvard University, Germany search Council. 1 See Fritz Scharpf, Crisis and Choice inEuropean Social Democracy (Ithaca, N.Y.: Cornell University States and the Reemergence of Global Finance: From Bretton Woods to the Press, 1991); Eric Helleiner, 1990s (Ithaca, N.Y.: Cornell University Press, 1994). 2 See Paillette Kurzer, Business and Banking (Ithaca, N.Y.: Cornell University Press, 1993); Wolfgang Streeck, Streeck, "German Capitalism: Does It Exist ?Can It Survive ?" in Colin Crouch andWolfgang (London: Sage, 1997). eds., Political Economy andModern Capitalism: Mapping Convergence andDiversity 3 and Inequality See Adrian Wood, North-South Tradey Employment (Oxford: Clarendon Press, and 'Globalization'" 1994); Edward E. Learner, "ATrade Economist's View of U.S. Wages (Paper pre of Cali of European sented at the Political Economy University Integration Study Group Meeting, fornia, Berkeley, January 1996).
World Politics
50 (July 1998), 507-46
508 This paper advances
WORLD
POLITICS
a different one that explanation, places much on processes of economic transformation and greater emphasis political we do not claim at the national institutional conditions level. Although we do contend is unimportant, that globalization that explanations fo on this factor tend to almost the cusing exclusively overemphasize sector salience of the internationally and integrated manufacturing underestimate the growing salience of the largely nontraded services sector. For facturing, important at the low the is in the of end of scale, wage generator jobs, especially services sector. Similarly, transnational nontraded about the arguments are to ization of investment since relevant primarily manufacturing, can on most not services be supplied only location and trade. through of capital markets renders integration Finally, although undoubtedly active Keynesian demand management less feasible, government poli cies toward public and private services competi (public employment, a on tion and so on) are having growing impact employment policies,
outcomes.
on in and wages example, focusing employment trade economists overlook the fact that the most
in manu
In contrast most past
to the this paper argues that the literature, globalization over the in the advanced liberal democracies important change three decades has been the transition from an economy dominated
by (exposed) manufacturing
production to one dominated by (shel
from portions of the emerging tered) services production.4 Borrowing a the literature on the postindustrial paper develops society, political economic model of the service economy which that govern implies a ments and nations confront choice, or "trilemma," between three-way income restraint, budgetary growth. While equality, and employment it is possible proved to pursue two of these it has so far goals simultaneously, to achieve three. Private service employment all impossible can be at a cost of wage only inequality. There accomplished equality can be is a priority, employment growth generated a cost either sector?at in the services employment public
growth fore, ifwage only
of higher tax rates or of borrowing (both implying lack of budgetary

restraint). In the paper we identify three possible strategies can pursue in the face of the trilemma, and we outline that governments the distributional
through
4 The relationship between tradedness and type of sector is almost perfect except for transportation in services is exported, compared with almost 50 services. Thus, only about 2 percent of production are also no an increase in service to percent in manufacturing. signs of Contrary popular belief, there and Holger C. Wolf, "International Evidence tradedness. See Jose De Gregorio, Alberto Giovannini, on Tradables and Nontradables Inflation," European Economic Review 38 (June 1994).
EQUALITY,
EMPLOYMENT, emphasis
BUDGETARY
RESTRAINT
509
in each. Our inherent politics and hence political-institutional most arguments cies and institutions.
on the scope for choice political to stands in sharp contrast divergence about globalization, which of imply convergence poli
distributional
our focus on an new set of In addition, important over its associated is with conflict material trade-offs, that the tran a decline the the in
the hypothesis of Inglehart5 and others sues, contradicts to sition is society accompanied by postindustrial
distributional politics.
The oretical paper is organized into three sections. The uses sectoral-level The second argument. to test the existence severity of the of the trilemma trade-offs. associated first outlines data on wages and to es and empirically The third, a case
employment timate the oriented Netherlands, ciated with
exploration
in Britain, Denmark, and the of the argument asso costs and economic the conflicts highlights political to the trilemma. each strategic response
The Argument: The Economic

The
The Trilemma
of the
Service Economy
Logic
in the wake of the in of manufacturing expansion employment into the 1960s was a result of two dustrial revolution and continuing was for manufactured main forces of change. First, the demand goods rapidly tionally on nonnecessities, modities, condition increasing less money as incomes allowed people growing on necessities, such as food and such as consumer durables. Unlike spend propor shelter, and more com agricultural income elastic?a to
was for manufactures demand therefore, as known Law. Second, because the perceived need Engels was was for material demand for manufactures elastic: high, goods price in demand. The into large increases lat lower relative prices translated ter condition
a is important it created link between because positive as wage in As and demand, growth, employment. long productivity creases did not absorb the entire in in the improvement productivity most sectors of in rel the reduction resulting dynamic manufacturing, in these sectors. ative prices could support an expansion of employment to grow and In turn, rapid productivity real wages growth permitted thus secured expanding markets and rising employment. Empirically,
Publics
Inglehart, The Silent Revolution: Changing Values and Political Styles among Western (Princeton: Princeton University Press, 1977); and idem, Culture Shift inAdvanced Industrial Press, 1990). Society (Princeton: Princeton University See Ronald
510
these relationships sequently by other In contrast since about price nation were
WORLD POLITICS
documented convincingly as economists well.7 by Salter6 and sub
to this age of industrial expansion, golden the early 1960s has been marked by decreasing is due for manufactured goods. The decline elasticity of market saturation and are more concerned
the period income and to a combi
sumers who
of manufacturing will productivity compensate for example,
consumption. no longer result for their labor-saving have found a
and choosy con increasingly wealthy the quantity with the quality than with in increases these conditions Under in sufficient increases in demand to effects. Appelbaum and Schettkat,8 between relationship
significant negative in most OECD and employment manufacturing productivity growth that stands in sharp con countries the 1980s?a relationship during manu trast to the As a consequence, age of industrialization. golden as was declines while (just employment facturing wages keep improving case in of first this the the half for agriculture century). a shift in has been accompanied in manufacturing The decline by sense sector in service has as this the toward and demand services, sumed which few
of employment growth. This fact is brought out clearly inTable 1,

shows the rate of growth manufacturing in employment in manufacturing or The and
the role previously
played
by manufacturing
as the main
source
With services for thirteen OECD countries during the 1970s and 1980s.
exceptions, service while employment in service employment growth but at the same time the decline has declined employment has been rapidly expanding. somewhat slowed down in manufacturing stagnated rate of
in the 1980s,
actually accelerated, a gap in rates of 3 percent. Considering roughly growth thereby leaving causes of the deep structural manufacturing employment? declining is hardly saturation and declining market price elasticity of demand?it realistic through transition The to hope services. for from sustained a future employment industrial expansion except
resembles economy the transformation with

6 W.
predominantly the shift in sectoral
one
E. G.
critical
difference.
of the agrarian Unlike

and Technical
to a service economy that accompanied employment in this earlier economy century?but the golden
Change (Cambridge:
era of manufacturing,
Cambridge University Press,
Salter, Productivity
and Ronald of the argument and the evidence, see Eileen Appelbaum expositions in Industrialized Countries," On Economic Development Schettkat, "The End of Full Employment? in Industrialized Coun and Productivity Intereconomics 29 (May-June 1994); and idem, "Employment 134, no. 4-5 (1995). tries," International Labor Review 8 and Schettkat (fn. 7,1995). Appelbaum
1960). 7 For excellent
EQUALITY,
EMPLOYMENT,
BUDGETARY
RESTRAINT
511
Growth
of Employment
1 Table in Thirteen and Decade Sector
oecd
Countries
by
Manufacturing
Services
Gap 1970-79
-3.27 -5.13 -2.01 -4.67 -1.41 -2.12 -3.51 -2.99 -4.48 -3.49 -3.42 -3.19 -1.68 -3.18
1970-79
Australia -0.90 -2.35 1.85 -1.32 0.94 0.07 -1.13 -0.35 -2.37 0.08 -0.67 -1.52 1.07 -0.51
1980-89
-0.25 -1.98 0.28 0.60 -1.23 -2.01 -0.31 1.28 -1.48 -2.19 -0.22 -3.16 -0.75 -0.88 Base
1970-79
2.37 2.78 3.86 3.36 2.35 2.19 2.38 2.64 2.11 3.57 2.75 1.67 2.75 2.67 (fn. 25).
1980-89
3.63 0.72 2.54 1.43 2.15 1.49 1.21 2.55 1.05 2.00 1.34 1.28 2.57 1.84
1980-89
-3.89 -2.70 -2.26 -0.83 -3.38 -3.50 -1.52 -1.27 -2.54 -4.19 -1.56 -4.44 -3.32 -2.72
Belgium
Canada Denmark France
Finland
Germany Japan Netherlands Norway Sweden
United Kingdom United States

Average
SOURCE: OECD International
Sectoral Data
in services has come in branches such as educa rapid growth and what calls care, personal tion, health services, Esping-Andersen9 to be "food and fun" services, where either tends productivity growth
the most
slow or tomask declining quality.Although

productivity differences in services across have
it is notoriously difficult to
im obviously studies by Bau among economists to productivity and patients, a decline are
measure
portant m?l and Bowen10 that service
and although there the pathbreaking branches,
growth.11 waiters more

9 Gosta
production can serve more Teachers customers,
broad consensus generated is inherently less conducive students, but this is not easily achieved
nurses more
without
The Three Worlds ofWelfare Capitalism (Princeton: Princeton University Esping-Andersen, Press, 1990). 10 William of Unbalanced Baum?l, "The Macroeconomics Growth," American Economic Review 57 G. Bowen, Performing Arts: The Economic Dilemma (1967); andWilliam (New J. Baum?l andWilliam York: Twentieth Fund, 1966). Century 11 and Prices Inside and Outside ofMan See, for example, Robert J. Gordon, "Productivity, Wages in the U.S., Japan, and Europe," ufacturing European Economic Review 31 (April 1987); and Bart Van in Post-War Europe," and Structural Change in Bart Van Ark Ark, "Structural Growth Accounting and Nicholas Crafts, Quantitative Aspects ofPost-War European Economic Growth (Cambridge: Cam Press, 1996). There is also evidence for a productivity gap between services and man bridge University in the sizable economic literature on the link between real exchange rates and differential ufacturing across sectors. For recent contributions to this literature, see De productivity growth Gregorio, Gio vannini, andWolf (fn. 4); and Kenneth Rogoff, "The Purchasing Power Parity Puzzle," Journal ofEco nomic Literature 34 (June 1996).
512
in the quality of the in services
WORLD POLITICS
service. factors is not to add that said this, we hasten issue. Organizational and some can inhibit or advance the of ser efficiency Having a moot
productivity times technological vice
in decline, the and with manufacturing provision; employment a sense more to promote in im of how service is question productivity than ever. portant Whatever the size of the productivity gap between manufacturing and the majority of services, the obvious of the shift in de consequence toward the latter is that it becomes bine difficult increasingly virtuous circle between to com
mand
lower prices. The rising wages with falling as of and real the demand, expansion rising during prices experienced most is therefore broken. the Instead, manufacturing employment, source of in ser of employment important expansion market-generated be vices, apart from the effects of changing patterns, consumption comes lower wages, into cheaper which translate and prices higher in services are tightly effective demand. Consequently, ifwages coupled with in manufacturing?where is faster? wages growth productivity cost disease and em service production will contract Baum?ls private will be slowed down. expansion ployment
to compensate in market-provided services?necessary High growth a for declining presupposes manufacturing employment?therefore more structure. in solidaristic Whereas wage policies /?egalitarian wage to the most tended to shift production efficient the industrial economy was sectors where increases the greatest the scope of productivity (as el in the solidaristic formulated Rehn-Meidner model),12 wage egantly policies workers in the service without tend to squeeze out the least productive economy a in the overall level compensating expansion creating on has thus effect of wage compression employment it kept down in demand; are kept high demand.
of activity. The because been reversed: in the past it promoted employment sectors in highly dynamic relative wages facing price-elastic it inhibits employment the present in the least dynamic sectors, which because relative wages also face price-elastic
The
As
Service Economy
Trilemma
two re out there are essentially by Esping-Andersen,13 pointed to in in this the lowest services, especially (1) wages sponses problem:
12 G?sta Rehn, tions 24 (Winter and Prospect," Industrial Rela "Swedish Active Labor Market Policy: Retrospect and Solidarity: An Approach to Wages Policy Co-ordination 1985); Rudolf Meidner, (Stockholm: Prisma, 1974). 13 and Mobility in Postindustrial Societies Gosta Esping-Andersen, Changing Classes: Stratification Class Struggle? European Class (London: Sage, 1993); and idem, "The Eclipse of the Democratic
EQUALITY, paid occupations, increase demand the responsibility
EMPLOYMENT,
BUDGETARY
RESTRAINT
513
panding public by social democratic
can be to fall in order to lower prices and permitted can assume or (2) the government and employment, ex at for employing workers relatively high wages by sector The latter option, heavily favored consumption. governments, has the obvious drawback that taxes in
and/or public debt must be increased to finance the growing public

wage bill. Socializing production centive problems that are liable Budgetary restraint in the of services to undermine can also create difficult economic inefficiency.14 of no or only moderate government on services15 is therefore to combine with difficult earnings spending in the emerging service and economy. This equality high employment set of trade-offs iswhat we call the "trilemma of the service economy," sense to borrow The a term from Swenson.16 1. Each of the three corners of is illustrated in Figure argument is a desirable for economic but at most the triangle objective policies, re two of these can be satisfied Because budgetary simultaneously. sector of public any rapid expansion employment, precludes to such must either accept low wedded governments earnings discipline or face in order to spur growth in private service employment equality in overall low growth may governments Alternatively, employment. can do so but and pursue earnings equality only they high employment, at the expense of restraint. budgetary use economies. We three ideal-type The trilemma suggests political of welfare of his three worlds capital designations Esping- Andersens17 ism to identify each type, although we caution that our use of the terms con narrower that is not directly has a much (and precise) meaning state. In some respects our discussion will be the welfare cerned with straint closer olutions dilemmas cussed to Kitschelt triple s18 account objectives of of the tensions liberty, with equality, between the French Rev though dis and fraternity, trade-offs
the main purpose of the typology is simply to elucidate the political

and choices above. associated the economic
and Social Policies Structures at Fin de Si?cle" (Paper presented to the study groups on Citizenship and State and Capitalism, Center for European Studies, Harvard University 1994). 14 of Organization," American Journal of Political Science 28 "The New Economics See Terry Moe, (November 1984). 15Here and throughout the article the term "budgetary restraint" is used to indicate no or little gov ernment provision of services, and hence lower spending, taxes, and/or deficits. 16 Peter Swenson, Fair Shares: Unions, Pay, and Politics in Sweden and Germany (Ithaca, N.Y.: Cornell Press, 1989). University 17 (fn. 9) Esping-Andersen 18 ofMichigan Herbert Kitschelt, The Radical Right inWestern Europe (Ann Arbor: University Press,
1995)
514
WORLD POLITICS Fiscal discipline
Earnings_Employment Social Democratic 3

The Trilemma Figure of the 1 Service Economy
Model
The equality
first
because market-generated ideal type is called neoliberal sector restraint and high private is traded for budgetary markets inherently in the economy leads are welfare maximizing, to a misallocation whereas
in em
ployment. Ideologically, this model

operating volvement self-reliance
is grounded in a belief that freely

state in The of resources. while
neoliberal ideology is combined with awork ethic that underscores

wages inter fare. In its pure form, the neoliberal model implies that policies a few the of with of with the free markets, operation exception fering as law and order, threaten the pursuit of such public goods important active labor-market through are seen to reflect the contribution participation, of individuals market to overall wel
individual liberty.19
The second model on does greater weight than markets
19 Milton
also emphasizes budgetary on individual equality and less the neoliberal

and Freedom
restraint, but it places and free self-reliance has its origins

Press, 1962).
type. This
model
in
Friedman,
Capitalism
(Chicago: University
of Chicago
EQUALITY,
EMPLOYMENT,
BUDGETARY thought against as well
RESTRAINT where
515
and Christian democratic corporatist are seen as bulwarks church, and family of effects unfettered markets, alienating encroachments sociational chical
community, the dehumanizing and as the against potential and freedom as of as
hierar inherently are and status differentiated, stark market-generated inequalities seen as a to the social order. levels, potential danger High employment are a in this model low priority because women by contrast, relatively are viewed as the are en of the traditional guardian family and hence couraged ment to stay at home and care for children and spouse.
of state power on the independence life.20 Although is recognized society
The third ideal type prioritizes earnings equality and high employ
but sacrifices budgetary restraint. This model has its performance, movement in in the labor and social democratic ide origins European a a it and combines ethos with work ethic that strong egalitarian ology, as the root of collective emphasizes identity and pride. Al employment the growth social democratic of a though parties, initially rising with male blue-collar shed their workforce, predominantly only gradually views on women social demo traditionalist and the family, modern come women as to cratic parties have everywhere recognize equal part ners in the social democratic for and for project solidarity employment all. Unlike the other models as a necessary tool to achieve jectives, and this has involved from the sees the state of society, social democracy its egalitarian and full-employment ob a certain measure of deliberate sheltering
an effects of the market in inegalitarian through expansion services and public employment.21 We would like to underscore that the three ideal-type labor-market are not to exhaustive of all the trilemma. responses regimes logically interaction economic the the between Rather, they emerge through constraints defined by the trilemma and the political projects expressed as an eco in historically inherited constructions. Conceived ideological nomic the trilemma the undermines of constraint, viability political that seek to achieve all three objectives but projects simultaneously, it does not logically preclude
Social Capitalism:
projects
that
seek
to maximize
single
to us that social democratic parties have a positive preference for expanding of services and that budgetary restraint is therefore not a concern. We disagree for two to socialization of production, mainstream social despite the rhetorical commitment creates incentive that such socialization democrats inefficiencies. recognize problems and economic Second, public provision implies higher prices on services (paid through taxes), and although the me dian voter may willingly sacrifice lower prices to support a certain measure of equality, this represents a trade-off where the utility-maximizing level of provision and taxes places an electoral constraint on gov ernment spending policies. We are grateful to Geoffrey Garrett for helping us to clarify these issues. public provision reasons. First,
20 Kees van Kersbergen, don: Routledge, 1995). 21 It has been suggested
A Study of Christian Democracy
and theWelfare State (Lon
516 goal?say,
accounts.
WORLD employment?or to understand
POLITICS achieve only modest success on all
In order countries understand to
the underlying causal dynamics that push to in the and order to trilemma, responses adopt the political-economic tensions in each ideal type inherent different
to these), one must pay close (as well as the possible strategic responses to the attention and political-economic institutions, coalitions, political constraints the perpetuation that support or challenge of any particular the neoliberal model draws its support primarily from the model. Thus, secure labor-market middle and upper middle classes in relatively posi tions, sarily and class it tends to exacerbate in what class distinctions Jessop22 has organization), The model, while poverty democratic not neces (though two-nations dubbed and by low taxation, large
projects.23 tends to perpetuate The markets Christian
promoting job creation and inner-city decay model facilitates inclusion more
trapping
numbers of people in insecure and poorly paid jobs.

by encouraging in a consensual and often dense by engaging and administration product markets. The actual provision to associations vices are delegated of businesses, private that constitute of the model the main pillars is its relative incapacity labor-market It is therefore of support associational labor egalitarian and (hereunder unions) of labor and regulation of many ser and workers, for the system. to generate well
professions The downside
paid jobs for allwho arewilling

long-term unemployment and older workers. among women much and
to work, thus producing problems of

exclusion, especially no coincidence that
of the political literature on countries such as Germany economy to insider-outsider is replete with references divisions. and Austria The social democratic model, inclusion by encouraging finally, promotes solidaristic wage equality policies and labor and by ex
market
panding
solidarity, the model
job opportunities
in the public
sector. By emphasizing
support for security, into the middle class.
for all, and labor-market employment from the working class well extends
22 Bob Jessop, Thatcherism: A Tale of Two Nations (Cambridge, England: Polity Press, 1988). The democratic Christian suspicion of the state goes back to the "national revolution" in the deep-seated See Seymor M. Lipset and Stein century, when church privileges were being challenged. eighteenth An Introduction," in Lipset and Rokkan, "Cleavage Structures, Party Systems, and Voter Alignments: Rokkan, eds., Party Systems and Voter Alignments (New York: Free Press, 1967). 23 In the U.S. case, where the worst paid and most insecure jobs are concentrated among minority (such as affirmative action) groups, ethnic divisions generate demands for labor-market regulations that are clearly contrary to the neoliberal ideal of efficiency and self-reliance. See also the discussion of in and Dualist Tendencies Mod "The End of Convergence: dualism in John Goldthorpe, Corporatist ernWestern in Goldthorpe, (Oxford: ed., Order and Conflict in Contemporary Capitalism Societies," Clarendon Press, 1984).
EQUALITY, Yet
EMPLOYMENT,
BUDGETARY
RESTRAINT
517
state the escalating of the social democratic financial requirements tax revolts and divisions sector between and private engender public a In of service addition, employees. by sheltering large portion produc tion from market the model is liable to create pockets of competition, and undermine international inefficiency competitiveness on fiscal taxation. When these constraints expansionism through become high nar
turns row, the trilemma can choose governments
into a difficult either
of services lation/privatization or to encourage exit through labor-market early retirement, pansion) women to work and that (a encourage stay at home sharing, policies Christian democratic recipe). our argument can be logic of readily For data each country Table (see 2). comparative of data: one for private services sector employment, The basic employment, as the magnitudes differs growth, cratic-dominated tor and one and for wage illustrated there with some rows are three
for social democracy: dilemma to promote wage and deregu flexibility ex tool for employment (a neoliberal
egalitarian services has been while structures, wage stagnant. private employment rose sector Public however, rapidly during the 1970s and employment, the early 1980s, causing a substantial increase in public spending (more to than 70 percent of all government goes consumption paying wages). in countries such as the United States and Britain, where By contrast, neoliberal for privatization and deregulation held sway during policies in private services rose rapidly while public sec the 1980s, employment tor Not and consumption remained employment largely unchanged. are also the countries in the table with the most ine these surprisingly, an structures in countries that and the wage only display galitarian crease in in two countries where the 1980s. Finally, inequality during and the democratic have been Christian dominant, parties Germany in service has been both the Netherlands, stagnant public employment sector (as in the and the private (as in the neoliberal countries) countries have instead performed social democratic These countries). in terms of holding back public consumption and taxes (budgetary well a structure. restraint) and maintaining earnings relatively egalitarian to convey, we in this section is intended As the discussion categori is tanta the service the that the rise notion of economy cally reject mount to a decline in distributive solutions Neoliberal impose politics. on cannot af who the costs of a rising private service economy people education for their health care insurance or adequate ford even modest sector
sharply Scandinavian
equality. Note sector of services composition to country. The from country countries have
sec one for public as well that equality, employment social demo
the most
518
WORLD POLITICS
Table Service Employment, Wage Equality 2 Employment, Countries and Government in Six oecd _(1970-89)?_ 1970-74 1975-79
1980-84
1985-89
Change
Denmark
private public wage
services services equality services services equality services services equality services services equality services services equality services services equality Sectoral Data
20
15 (21) 19 17 (23) 75 20 13 (19) 26 10 (18) 21 7(15) 17 8(17)

Base
Sweden
private public wage
Britain
private public wage
United States
private public wage
Netherlands
private public wage
21 18 (24) 71 20 22 (27) 76 22 15 (21) 60 27 11 (17) 54 21 8(17) 18 9(20)
Germany
private public wage
20 22 (27) 71 20 25 (29) 76 23 15 (22) 59 30 10 (18) 51 21 8(15) 65 18 10 (21) 60
21 22 (25) 71 22 26 (26) 75 21 14 (20) 56 34 11 (17) 49 21 7(17) 65 19 10 (20) 64

Outlook
1 8(4) 1 2 9(3) 1 7 KD -4 9 OH) -5 0 0(2) 0 2 2(3) 4
SOURCES: OECD International
(fn. 25); and OECDEmployment
(Paris: OECD,
1991,1996). as percentage ^Private services refers to total employment (excluding transport and communication) as percentage of the adult of the adult population; public services refers to total government employment population as a percentage of the GDP (in (first entry), and total government consumption parenthe as the ratio of gross earnings of a worker at the bottom decile of the equality is measured relative to the worker at the median (dl/d5 ratios). Change is the difference be earnings distribution tween the first and last period. ses); wage
children; Christian
class divisions. The such solutions perpetuate consequently, on associ its democratic model, very emphasis delegated by fails to provide adequate ational self-regulation, opportu employment to work labor-market and thereby breeds nities for all who want social dem the outsider classes. The exclusion and resentment among own set of its divisions ocratic model, by pit political finally, generates sector workers each of public and private against ting the interests re a that usefully other.24 Thus, while postmaterialism may be concept
24 Peter Swenson, "Labor and the Limits of theWelfare State," Comparative Politics 23, no. 4 (1991). of Trade Unions, Cor "The Sectoral Composition See also Geoffrey Garrett and Christopher Way, and J?rgen von Hagen, in and Economic Frieden, Performance," Eichengreen, Jeffry Barry poratism and Fiscal Policy in an Integrated Europe (New York: Springer, 1995). eds., Monetary
EQUALITY, fleets some
EMPLOYMENT,
BUDGETARY
RESTRAINT
519
and although blue traditional aspects of electoral politics is clearly in decline, the rise of postindustrial collar class politics society does not imply a decline (or, if one of, let alone an end to, materialist of this article supports this thesis prefers, class) politics. The remainder by empirically ated with demonstrating the political-economic trade-offs inher
ent in the trilemma and by highlighting

each of the trade-offs.
the political struggles associ
Exploring
In mapping goal variable out
the Argument:
the distinct political
Quantitative
Evidence
to the trilemma, each responses can be treated In the how argument, testing identically. to be clear about the causal structure. ever, it is important underpinning of ser the economic In particular, argument implies that the expansion is negatively vice sector employment affected by both wage equality and In contrast, we are not saying that equality and re restraint. budgetary in service employment straint can be explained (or by one by changes we will allow for recursive causation in the statisti another). Although man our aim is not to and cal analysis, public explain wage equality as we treat instruments. these Instead, power policies. policy is straightforward, this argument In the case of public employment, to the usual since the government constraints) (subject parliamentary can to In the service functions. directly employ people public perform more case of is of the the role government complex earnings equality, over the influence and indirect, but it can clearly exert a substantial structure. As we discuss in the case-oriented section, minimum wage automatic social contributions, wage mandatory employer legislation, extension collective laws, and a bargaining cost-of-living adjustments, host of regulatory measures that affect the strengths of unions (as well on the basis of wage costs) can as the pressure on to compete employers do not for relative earnings. We have notable consequences obviously dispute that other government ture such that mental Data One can have that the but we do maintain factors are important, a on struc the strong impact earnings sufficiently as an instru to treat it is informative earnings equality
variable. and Operationalizations sources on the service sector study by data for both manu is a recent
of the few data
the OECD25 containing

25 OECD, The OECD International
earnings
and employment
Sectoral Data
Base
(Paris: OECD, 1993).
520
WORLD
POLITICS
services in thirteen OECD countries.26 and private and public facturing The includes data for about thirty annual and wage employment study in services of industry and the period from 1970 to 1990.27 branches the somewhat limited country coverage, this is by far the most Despite source for economic data on the service economy.28 of services?transport, and communication?is storage, so that it is unclear historically closely integrated with manufacturing as a service.29 the it should be counted whether Fortunately, employ ment sector are so similar across countries in that it does this changes comprehensive One class not matter vice sector from much for the results whether or a it manufacturing simply excluded of services?finance, the analysis. A second category insurance, to be excluded real estate, and business because of in services?had we ex of this exclusion, data.30 To gauge the consequences complete amined to find the data for countries definitions and failed using compatible structure and em between the wage be that some of these than most to others. services This in this category sector. We therefore is treated as a ser
any apparent relationship reason may in this sector. The ployment are more traded and knowledge-intensive turn could afford
in high specialize opportunities most out of the the value-added promising path services?perhaps a poor is removed when from trilemma. However, performer (Japan) between and the sample, the negative employment relationship equality for countries reappears in this sector.31
26 The thirteen countries are Australia, Finland, France, Germany, Belgium, Canada, Denmark, and the United States. The study also Norway, Sweden, the United Kingdom, Japan, the Netherlands, includes Italy, but that case presents intractable data problems. Our suspicion was raised by the results in Italy is nearly twice that of the country with the for wage dispersion, which indicate that dispersion next highest score. In view of other data pointing to a relatively compressed wage structure, this is sim see Robert Rowthorn in Jukka and Labour Market Performance," "Corporatism ply inconceivable; (Oxford: Clarendon Press, eds., Social Corporatism Pekkarinen, Matti Pohjola, and Bob Rowthorn, in Torben Iversen, Institutions andWage Distribution," "Labor Market 1992); and Jonas Pontusson and and David Soskice, eds., Unions, Employers and Central Banks: Wage Bargaining Jonas Pontusson, an Macroeconomic Press, forthcom Regimes in Integrating Europe (Cambridge: Cambridge University some sectors have wages that are much that ismuch lower higher but employment ing). As it turns out, than in comparable countries. This suggest that some of the wage data in Italy refer to small and rela that in certain sectors. In lieu of detailed documentation segments of all employees tively well-paid the problems, we had to exclude the Italian case. could help us to pinpoint 27 Some data are also available for 1990-92, but they are incomplete. 28 see International For a fairly detailed account of sources and methods, Meyer-zu-Schlochtern,^? and Statistics Department Working Sectoral Database for Thirteen OECD Countries" Economics Paper (Paris: OECD, 1988). 29 sector. See De Gregorio, and This Giovannini, similarity also holds for the tradedness of this Wolf(fh.4). 30 For some countries only a subcategory is available, while for others data are provided only for the sector. whole 31 The effect of excluding Japan points to another methodological problem, since it iswell known that many financial and producer services are provided in house in Japan and counted as manufactur
EQUALITY, All told,
EMPLOYMENT, that we were
BUDGETARY
RESTRAINT
521 ?
the services retail
able to include
wholesale,
and hotels, trade, restaurants a wide services?ac and services, range of publicly personal provided count for about 80 percent of total service employment, and they in in 1970 creased their share of total employment from about one-third as a result of a 53 per to about one-half in 1989. This shift occurred cent increase in the to more number than
in our analysis social and community,
(amounting the rest of the economy below the the private services we include were everywhere significantly on as a whole level of earnings for the economy (20 percent average). in private Much of the expansion service employment thus seems to have in relatively low-paid the salience of Considering come occupations.32 the services that we include for the
sectors in these of people employed 3.5 million while in workers), employment It is also noteworthy that wages in declined.
growth of employment
causes
in the 1970s and 1980s, understanding
the
tell a very important part of the story about of this growth would in since we are interested the rise of the service economy. Specifically, in the rise in services employment, variance cross-national explaining we in the employment ratio as a (first differences) period changes in services as that is, the total number of employees variable, dependent are defined a of The the working-age proportion population.33 periods are as to vari short enough intervals that capture interesting three-year use ance across in the rate of change fluctuations of short-term impact This gives seven to reduce the time, yet long enough to our theoretical unrelated argu us a total of observations (thirteen coun ninety-one
ment.34 The
periods).35 measure of is based on the standard deviation earnings equality mean of across all sectors of an economy, divided overall the by earnings an 0.2 means that one of For example, earnings dispersion earnings.36
since the early in countries like Britain and the U.S. outsourcing has been very widespread ing, whereas Matters 1980s. See Stephen S. Cohen and John Zysman, Manufacturing (New York: Basic Books, 1987), chap. 4. 32 sectors in terms of their wage rates to assess It is not clear that it is meaningful public growth see Garrett andWay since these are politically determined; (fn. 24). Yet in countries where public em were rest of the economy. generally lower than in the ployment grew fast, public wages 33 rate (the ratio is distinct from the more familiar concept of the employment The employment the latter is highly correlated with the number of employees divided by the total labor force). While to generate jobs for those in the interested in the capacity of the economy former, we are primarily not just for those registered as seeking employment population, working-age 34 more are identical, suggesting reason is that some that these are not A pairs of figures practical truly independent observations. 35 Because we used lagged variables in the regression analysis, the effective number of cases is re duced to seventy-eight. 36 earn data are nearly complete for twelve of the thirteen countries; for Australia The branch-level are missing for several sectors. In order to obtain comparable earnings equality figures for ings data
tries times
522
standard deviation
WORLD POLITICS
to 20 percent of average is equivalent of earnings measure our purposes to the is this For earnings. dispersion preferable more familiar in 2 it Table ratios because decile elim earnings reported inates problems by the number it is not affected and because coverage sectors in highof people and low-wage employed to In is of be the (which part employment explained).37 performance we than inverted order to measure earnings dispersion), equality (rather of limited time
the dispersion variable so that higher values imply higher equality.The

data are based on OECD s
earnings sions The services
ployee, which
and social other
include both wages and nonwage benefits (such as pen

security contributions). policy instrument, public employment, is simply the num
figures
for gross
earnings
per em
ber of people employed directly by the government to perform public

and so on). To gauge teachers, nurses, postal workers, (including on the effect of public manpower restraint, we de budgetary policies in total public outlays that is the inverse of the change vised a variable as a of the gross domestic for wages product. A value of 0.02 proportion on on the means restraint that variable government spending budgetary of GDP was reduced by 2 percent be and salaries as a proportion wages tween two it means If the measure is negative, that spending periods. is rising faster than the GDP and consequently that the public services as a share of the total economy. sector is all other Holding expanding a taxes value would constant, expenses negative imply rising public deficits.38 and/or growing
Descriptive
Statistics
in the private service sector. The and change in Figure 2
Our expectation is that high earnings equality will inhibit expansion of

employment negative
lends preliminary support to this hypothesis by indicating a fairly tight

fit between earnings equality in the private service
scatterplot
the level of equality in all countries based on the restricted set of this country, we first calculated case. the relative levels of Australian branches available for the Australian earnings equality Using (measured against overall annual means), we then inferred the absolute levels from figures calculated on the basis of all branches in the twelve remaining countries. The procedure assumes that relative is the same for the full set of branches as for the restricted set, an as earnings equality in Australia sumption 37 In a hold when tributional that would appear fairly innocuous. also related paper we show that the trade-offs between earnings equality and employment and Torben Iversen, "Choosing Paths: Explaining Dis using decile ratios. See Anne Wren of the in the Post-Industrial Outcomes Economy" (Paper presented at the annual meeting
Political Science Association, Washington American D.C., August 28-31,1997). 38 is equivalent 14 percent of GDP in 1985, which On average, the government wage bill constituted to about three-fourths and somewhat less than half the total of total civilian government consumption a to military average government spending and variety of subsidies and transfer budget (the rest going programs).
EQUALITY, 0.03
EMPLOYMENT,
BUDGETARY
RESTRAINT
523
0.2 Earnings
0.25 equality
0.35
Earnings
Equality
Figure 2 in Private and Change
Service
Employment
this initial test, al ratio. Clearly, the argument passes employment we do not want to exaggerate of the relation the determinism though one be cautious in drawing should causal inferences Not ship. only room is for varia from bivariate but there also correlations, obviously In fact, our theoretical discussion in services for would growth capacity productivity thus shift and the equality-employ expand employment opportunities a whole ment outward. Hence, schedule range of nationally specific tion in the severity implies that greater of the trade-off. trade-offs in Figure 2.39 may be represented simultaneously to compare It is instructive this pattern with that in manufacturing no sector between is this there For apparent relationship (Figure 3). and earnings that
thus supporting the Rehn-Meidner equality, in firms en lowand argument high-productivity linking wages to be for in the former ables redundancies by expansion compensated employment
literature on the Phillips curve, which likewise is an analogy here to the second-generation and inflation depend in the location of the trade-off between unemployment allowed for differences on national institutions this literature, however, institutions). Unlike (especially wage-bargaining ing our argument is not vulnerable to the rational expectations critique. 39 There
524
0.02 T
WORLD
POLITICS
?) i-0.02 O -0.03 -
. _
-0.04
\-1-1-1-1-1-F-1-1-1-1
0.10
0.15
0.20 Earnings
0.25 equality
0.30
0.35
Earnings
Equality
Figure 3 and Change inManufacturing
Employment
of employment
in the latter. In the past faster productivity
ity, by inducing if of aggregate pansion employment accompanied by active (especially labor-market In the rising service economy, this however, policies).40 no logic longer applies. can As argued above, governments for the cost of equal compensate terms of lower sector to in of service the private ity capacity expand by sector such obvi However, increasing public employment. expansion comes ously in budgetary a reduction at the expense of a rising wage bill and thus of restraint. As noted above, lack of restraint has to be paid
the promotion of wage equal even have led to an ex growth, may
for in the form of either rising public deficits and debt or higher taxa tion. The relationship is illustrated in Figure 4, which plots budgetary
restraint against total working-age changes as a proportion public employment to (measured analogously private population in of the service
employment).
that competition countries has created a from low-wage argument by trade economists would make the equality negative link between wage equality and manufacturing employment trade-off in the trilemma even more severe; seeWood (fn. 3); Learner (fn. 3). However, employment we do not find any evidence in the data that this has occurred. 40 The
EQUALITY, 0.03 T
EMPLOYMENT,
BUDGETARY
RESTRAINT
525
-0.01
0.00
0.01
0.01
0.02
0.02
0.03
0.03
Change inpublic employment

FIGURE 4 and Budgetary
Change
in Public
Employment
Restraint
a between there is a clear negative relationship surprisingly sector restraint. ratios and budgetary in change employment public one as as not is have the However, suspected. The tight might coupling a variable reason is that the the that determines is of labor main price Not budget ceteris paribus an of employment expansion. Although an levels must result in higher expenditures, of employment expansion restraint can greatly reduce the fis effective policy of public sector wage to the from such expansion. This points cal pressures impor resulting effects tance of the institutional topic litical that has economy received setting for wage relatively literature.41 setting little attention in the public sector?a in the comparative po
Model
Because cause we use
41
Specification
we are interested
and Estimation
in and be in employment unit has variable roots, to since it is reasonable
the modeling an error correction
change explaining of the level of employment model. Moreover,
Important
exceptions
are Garrett
andWay
(fn. 24); and Swenson
(fn. 24).
526
expect qualities the sectoral over
WORLD POLITICS
of employment composition error an correction model time, to (in addition offering relationships shortand medium-term to exhibit is well The suited an intuitive equilibrium to capture
long-term tion of the
dynamics).42
interpreta model has the
following form: + + A Employment^) = ?xEmploy>ment(t-l) $2 Equality(t-1) + + A Government^) + A $4Government(t-l) ?5 ?3 Equality(t)

controls + 8
where Employment^)
at time
is the ratio of total (service sector) employment
is the level of earnings equality at time t, Govern t, Equality^) at time t, and A is the is the level of government ment^) employment first difference operator. use of both levels and changes of the earnings equality variable a very the of causal effects. Thus, interpretation permits straightforward on the measures or the long-term level of coefficient lagged equality an increase in on whereas the of effect permanent equality, employment or for the first difference indicates the short-term coefficient transitory The effect of such an increase.43 We should note that the independent vari
ables in themodel include both the level and the change in government
even consti by definition, public employment though, employment, tutes a in total service The reason is portion of the change employment. over into not be carried that public decisions may employment fully outcomes It is affect the trilemma). (which would employment common to argue that in new classical economics, for example, raising sector sector will crowd out private employment, public employment to regu the costs of using public manpower thereby increasing policies service crowding-out concerns since the possible role of recursive causation, special issue em in in is it is conceivable affected that change by changes equality in employment For example, could improve rapid growth ployment. and overall wage demand for the low paid, thereby raising low wages A least of this possibility, we employ a two-stage as an in equality treated squares regression model with change endoge were executed with a full set of dummies nous variable.44 All regressions equality. To take account
42 For details, see Nathaniel Beck, "Comparing Dynamic Specifications: The Case of Presidential of Michigan in James Stimson, ed., Political Analysis (Ann Arbor: University Press, 1992). Approval," 43 Ibid. 44 as an Only change in equality should be treated endogenous variable since change in employment at time t cannot affect at time t-1.We estimated the instrumental variable for change in equal equality ity by using all exogenous variables (both levels and change) except country dummies. Country dum in the second-stage mies were left out to avoid problems of multicollinearity regression.
late total employment. directly for potential
By
including
these variables, effects.
we want
to control
EQUALITY,
EMPLOYMENT, Table
BUDGETARY 3
RESTRAINT
527
The
of Employment Determinants Budgetary Restraint3

Dependent Change Services Employment Ratio in Change
Ratios
and
Variables in
Manufacturing Employment Ratio Budgetary Restraint t 3.99
b
Intercept 0.047***
t
3.36
b 0.051*:
b
0.115***
t
3.85
Lagged dependent
level variable Lagged earnings -0.093*** -3.13 -0.047** -2.29 -0.032 -1.14 in earnings -0.474*** -2.63 -0.072 -0.61 -0.030 -0.52 -0.134* -1.88 -0.147* -1.93 -0.523*** -3.58
equality
Change equality
Lagged public
Change employment in public employment
0.067
1.197***
0.84
9.70
-0.307***
-3.04
-0.924***
-3.26
Growth of productivity
in services
0.000
0.24
-0.076*' -7.12 2.79
-0.033
-0.94
Growth of productivity
in Trade Capital liberalization International capital Economic Adjusted Number * flows boom R-square of cases -0.006 0.003*** 0.85 78 -1.64 7.23 market -0.038 -0.55 -0.158*! -2.26 0.029*** 3.68 manufacturing
0.020
1.29
0.046*:
0.009
0.42
0.001 0.004***
0.73 78
0.17 7.26
-0.005 0.237*** 0.67 78
-1.66 2.79
** *** at .001 level (two-sided tests at a .10 level; at .05 level; significant significant Significant with panel-corrected standard errors) a Results are from a two-stage least squares regression, including the listed variables plus a full set of country and period dummies (not shown).
for both
countries
belonged ever, whether equality
that these time periods indicated since F-tests results are very similar, how in the model.45 The substantive and or not the dummies are shown are included.46 The in Table 3. In interpreting results using both the findings,
measures
45 Durbin's h and m tests did not indicate problems of serially correlated error terms. 46 In fact, while the parameters are nearly identical, the t-scores for the theoretical variables (espe are considerably increased if the dummies are excluded. (The ones reported inTable 3 cially equality) conse can thus be considered lower bounds.) However, excluding the dummies has the unfortunate quence of rendering the model no longer stationary, because different country intercepts affect the
528
cant
WORLD
POLITICS
begin by noting that earnings equality has a statistically highly signifi

effect on service sector employment. Part of the effect is negative a but is also there effect, which transitory, large permanent implies that a level of wage affects the capacity of labor particular equality greatly markets to conditions (here changing adapt supply-and-demand to absorb the flow of labor from the manufactur the capacity primarily increase in equal terms, a standard deviation ing sector). In substantive to 12,14, in the employment and 16 percent reductions ratio ity leads after to
losses are consider 1, 3, and 6 periods, (short-term respectively our countries In able due to a large transitory several of this effect). em into hundreds translates of thousands of workers, posing difficult in a deindustrializing economy.47 ployment problems sector in is close to The parameter for change public employment sector not is which that unity, hiring causing any imme implies public sector time the em of private Over diate displacement employment. from but our effect government hiring slowly dissipates, ployment effects are so gradual that the crowding-out that suggest new can the government compensate through hiring without raising as a In turn, this gradual of the total economy.48 spending proportion is sufficiently small that it does not ap rise in government employment simulations the public pear to outpace allowing growth, employment population increase. ratio to settle at a stable level after a targeted term the government In the short to medium may also be able to in active macroeconomic fluence performance through poli employment we a cies. To allow for this possibility, devised variable, called "economic boom," and which measures changes in the differences between OECD s es
timates of national equilibrium rates of unemployment

rates of unemployment. use of macroeconomic instruments and the actual
(called NAIRUs)
If governments differ in their are indeed if these instruments
estimated parameter for the lagged dependent variable. Fortunately, multicollinearity problems are not severe use of a full set of dummies. enough to preclude the 47 raises the Our interindustry measure of wage equality refers to the economy as a whole, which that the employment effect of equality is an unexplained of wage level consequence logical possibility To check this we tried to control for the level of interindustry ing within manufacturing. equality within manufacturing. This did not substantially affect either the parameters or the t-scores. The pa rameter for economy-wide wage equality was in fact slightly raised, to -0.104, while the parameter for leveling was small, positive, and statistically insignificant. All other parameters intramanufacturing were In other words, what seems to matter is the degree to which wages in ser essentially unchanged. what the theory tells us. in manufacturing?precisely vices are tied to wages 48 These simulations are logically simple (they simply employ the regression results reported inTable 3), but they are computationally quite complex because of the need for backward induction in the pres ence of permanent and transitory effects in three separate equations. We have devised a spreadsheet this program is available from the authors upon program to make the calculations more manageable; request.
EQUALITY, the effect effective, the NAIRU rate of caused fects
EMPLOYMENT, should
BUDGETARY in the form
RESTRAINT of deviations of course
529 from also be
be revealed
unemployment.49 by swings in the economic are exogenous to our model
Deviations business and
may cycle, but either way the ef should be controlled it for. As
turns out, economic or result whether booms? politically engineered in the from business per ing swings cycle?do improve employment are but the effects and do not affect our main formance, cyclical conclusions. We also tested indicators. for the potential effects of globalization, using three The first measures trade exposure and is the sum of
separate as a of GDP, the second seeks to cap exports and imports proportion ture con liberalization the relative absence of capital-market by capital a measure the is the actual and third of cross-border flows of trols, as a are All of GDP.50 variables in the form of first proportion capital to assess the effect of since we want internation differences, increasing on at service in employment. alization first Looking changes employ none of these variables have notable ment, (or statistically significant) are no is hardly effects. This that there surprising, given compelling reasons to expect to affect in sectors internationalization employment of globalization. In manufac processes em is negatively liberalization associated with turing, capital-market has no discernible but actual capital mobility effect, and ployment, it is unclear why open trade appears to improve performance. While sheltered ness of capital markets but not actual movement of capital should af in trade can be the positive effect of an increase fect employment, en are the fact that domestic markets effectively by being explained larged by such trade. The effect strongest of capital-market liberalization is clearly on that are largely from
budgetary restraint (see the third column inTable 3). It does indeed ap
on movement of restrictions govern pear that in the absence capital more ments to be feel pressed fiscally conservative, probably because of can the higher costs of running deficits. To the extent that governments
49 rates were obtained from the OECD, Fiscal Position The data on NAIRU and actual unemployment and Business Cycles Data Base (Paris: OECD, 1996). 50 as exports are calculated from the The trade data are measured plus imports divided by GDP, and ismeasured by an index of the ab OECD, Historical Tables (various years). Capital market liberalization sence of restrictions on the free movement of capital as reported inDenis P. Quinn and Caria Inclan, A Study of Current and Capital Market Account Liberaliza "The Origins of Financial Openness: as the total cross tion," American Journal of Political Science 3 (July 1997). Capital flow is measured border flows of all types of capital as percentage of GDP and is reported in Duane Swank, "Funding in Advanced and the Taxation of Business Market the Welfare State, Part I: Global Capital at the annual meeting Political Science Association, of the American Economies" (Paper presented are to these authors for making their data available. San Francisco, 1996). We grateful
530
finance
WORLD POLITICS
in taxes, however, higher consumption through capital-market not pose a sometimes with the should tegration Compared problem. on all claims for the negative effects of globalization aspects grandiose our results therefore to a more cautious of the domestic economy, point liberalization clearly places constraints position. While capital-market on deficit-financed ment, the fiscal to expansionism, it has little effect on and trade seems engine improve performance of employment growth to have been in manufacturing. over unaffected employ Most three by trends
importantly,
the past
decades?services?appears toward greater globalization.51 An growth. marred market siderably important Unfortunately, by methodological for most services, across countries,
largely
issue concerns
the employment effects of productivity in services is of productivity the measurement difficulties. Since there is no international the price making of an identical simple indicators service can vary con of output per em
ployee highly misleading. The problem is somewhat alleviated by our

focus since this requires only reliable compar productivity growth, since output per employee will neces isons across time. Nevertheless, in and the cost increases both underlying productivity sarily incorporate of trends are problematic. The main and price of a service, comparisons tively related to induced price increases must cost-push employment, The net effect (as mea related to employment. be negatively on
difficulty is that while we expect underlying productivity to be posi

necessarily
sured by output per head) therefore depends on the strength of these
forces. opposite a tell us little about the Nevertheless, negative value would although could be negative, effect of "true" employment zero, or (it productivity a zero or had at effect would suggest that productivity positive positive), movements all least some employment-enhancing (since consequences a To examine this pos in cost conditions negative relationship). imply a variable for the average output per we employee sibility, incorporated across all services. It turns out that the effect of this variable is indistin from zero (and positive), which suggests that the true under guishable rate of is employment But even augmenting. growth lying productivity the this interpretation, if one does not buy the assumptions underlying it in itself because that effect is important absence of a negative implies can be alleviated the pressure for greater wage through inequality without services negative generating employment higher productivity effects.
51 Data andWolf on the tradedness (fn. 4). of services also show no signs of growth. See De Gregorio, Giovannini,
EQUALITY, The
EMPLOYMENT,
BUDGETARY
RESTRAINT
531
is also useful because it helps verify the output per head measure a existence of services and manufacturing between gap in productivity we ?a a source that is have of the tension between gap major argued measurement and the for ser equality growth. Although employment vices productivity output per head a in of the growth may be exaggerated, comparison in the two sectors shows that it is much lower in ser
vices
than in manufacturing. Thus, whereas output per head increased an average of about 1 in it increased by an average services, percent by over of well in manufacturing?a 3 percent that is consistent pattern across countries and time.52 This being the case, the infeasibility of hir at low wages struc in the case of an inflexible and ing compressed wage ture would raise the relative prices of services and hence reduce demand
and employment (the magnitude of which depends on the elasticity of

an is how argument, important question in manufacturing. and productivity affect employment wage equality in the second column The results of Table (shown 3) stand in sharp contrast to those in services. Thus, while the effect of wage is equality theoretical strong cluded and significant a control for negative effect on employment. equality, When we in for demand). In testing our
substantially smaller (though statistically significant), productivity has a

intramanufacturing the coefficient
economy-wide equality dropped only slightly, but the coefficient for in

turned out to be statistically and substan equality zero. In other words, much of the from tively indistinguishable negative turns out to be a con effect of equality for manufacturing employment across sectors of wages rather than across of the linking sequence tramanufacturing manu industries.53 wage Interindustry manufacturing leveling within a not seem to be a therefore does for facturing employment, problem re is with this consistent result that the Rein-Meidner model. When to the results sult is juxtaposed that is pattern unambiguously wage for private services, there emerges a clear of our theoretical argument: but not in manu in manufacturing
supportive in services growth equality reduces employment is labor saving facturing, while growth productivity but not in services.
52 These
are similar to those estimated in one of the most studies of produc figures comprehensive (fn. 11), 714-16. Gordon finds that services productivity pro lagged manufacturing tivity by Gordon in Europe and the U.S. by a factor of about 2-4 from the early 1970s to the mid-1980s. The ductivity gap was greater for Japan. 53 inmanufacturing A likely reason is that high-productivity workers will seek to recapture the "pro for competitiveness and employ consequences ductivity rent" by raising real wages, with deleterious ment. This coordination of wages is similar to the argument by Garrett andWay that cross-sectoral undermines wage restraint and competitiveness (fn. 24).
532
Turning now
WORLD to our third
POLITICS
it restraint, variable, budgetary dependent to discover is that increasing public sector employment hardly surprising to exercise the government's restraint reduces (see the third capacity a column of Table Yet model leaves the statistical considerable 3). amount should it is not obvious of unexplained that this variance. While be the case, it is obvious that the only source of this variance?
given the definition of budgetary restraint?is differences in the cost of

we it is not central to the argument, that labor. Although conjecture in the public wage differences formation have fiscal process important most of the variance in labor costs is between consequences (given that countries). stitutions be critical Our sector wage in and well-designed public policies sector wage for public would therefore appear to bargaining for an effective public employment policy.54 Effective section can be summarized in terms of the trilemma
by as instru and earnings treating equality policy public employment to es ments. Thus, it possible the results for service employment make timate about under different policy choices, assumptions performance induction we can estimate the policies and through backward required a to of employment combination bring about particular performance illustrates the consequences of and equality/restraint.55 5 Thus, Figure on two dimensions on in for the trilemma the value high performance the third. The cated both The by double mean. The their its absolute from main it differs
findings
above, and for each model the policy goals that are highly valued (indi
lines) have been set to one standard deviation above of by which implication value and the number itsmean. for the third is then calculated deviations in terms
examples
correspond
to the three
ideal
types
discussed
of standard
a neoliberal cost of is, combining strategy?that pursuing in the sector?is restraint with budgetary private high employment of equal the estimated level lower earnings equality. Thus, substantially mean. Because in is scenario 2.1 deviations below the this standard ity structure affects only service employment, the distri the wage private in order to achieve of earnings has to be highly inegalitarian em while overall up public making high performance, employment comes restraint. The U.S. losses necessitated by budgetary ployment even in the U.S. ideal type, although closest to the neoliberal case, earn bution ings are somewhat less inegalitarian and performance on the employ
54 For a similar argument, see Scharpf (fn. 1), chap. 10. 55 are but computationally As noted above, these simulations complex. logically straightforward like to make similar simulations on results derived from the same or different data Readers who would can acquire a simple but useful spreadsheet program from the authors.
EQUALITY,
EMPLOYMENT,
BUDGETARY
RESTRAINT
533
a) The Neoliberal Model

Budgetary restraint
Earning? equality
High employment
b) The Christian Democratic Model

Budgetary restraint
c) The Social Democratic Model

Budgetary restraint
Earnings
High equality employment
_ Earnings High equality employment
Three
a The The double
Models
Figure 5 of the Trilemma and Their

variables
Associated
Costs2
above their mean.
lines indicate that the associated
are one standard deviation
top figures inside the triangles show the predicted level on the third variable (the "cost"), and the represent the number of standard deviations from the mean. All calculations are figures in parentheses for the long run. .
ment
and budgetary sacrificed
restraint
variables
somewhat better
less impressive private sector
than em
implied by the ideal type. Still, countries such as theU.S. and theU.K.
clearly equality in order in the 1980s. model the cost of combining restraint budgetary in terms of sub is measured growth (equal to 2.1 stan to achieve ployment performance In the Christian democratic with relative
stantially Netherlands ployment
earnings equality, lower service sector employment come close to this but
dard deviations). As
performance
illustrated inTable 2 above, Germany

ideal type with exceptionally low government consumption
and the
poor em and fairly
534 high sector levels of wage
WORLD equality. By
POLITICS contrast, the social democratic model
achieves high employment expansion and equality by increasing public

restraint and sacrificing budgetary (the latter being employment 1.9 standard deviations below the mean). Denmark, and Swe Norway, of den are almost perfect this since ideal type, examples employment are both about one standard deviation above the mean, and equality on is restraint 1.2 deviations below. while standard average budgetary are the not of the notion results supportive regression only Clearly, of a service but they also resonate well with actual trilemma, we will look more In section the country experiences. following closely at the of three of these and countries?Britain, Denmark, experiences economy
the Netherlands?which
pose of this discussion but logic of each model the strategic predicaments
represent the different ideal types. The pur

is not also to describe the only political-economic to show the inherent contradictions each gives rise. and
to which
Exploring
the Argument: the Costs

the most
Three
Country
Experiences Route
sample of as is clearly visible in our a
The UK: Incurring

The U.K. case provides
of the Neoliberal
dramatic model example to another,
from Table 2. In the early 1970s themagnitude and composition of ser

vices in the U.K. most that of the social closely resembled employment countries and Sweden), while wage democratic (Denmark equality, al was With the ar democratic below social levels, relatively high. though in the 1980s, however, private service employment rival of Thatcherism and income equality in the public sector declined, soared, employment to well below average levels. European dropped rapidly of a social democratic agenda in Britain, in spite of the presence
shift from one political-economic
The 1970s had proved a particularly difficult period for the advance levels of debt, a cur
ment
of a Labor government from 1974 to 1979. High
for strict reductions of demands rency crisis, and finally the attachment IMF on to the emergency the extended loan by increasingly borrowing to cease the Wilson the fiscal constraints, government forcing tightened
expansion of public employment (which had increased by ten million

the fiscal wage benefits of these cut pressure. Relations between
in the preceding decade).56 However, backs were undermined by continued
56 Peter Hall, Governing theEconomy (Oxford: Oxford University Press, 1986), chap. 4; Terry Ward, to Open Confrontation: The Case of the UK," in Robert Boyer, ed., The "From Mounting Tension Searchfor Labour Market Flexibility Press, 1988). (Oxford: Clarendon
EQUALITY,
EMPLOYMENT,
BUDGETARY
RESTRAINT
535
the government and the unions were the largely conflictual throughout at increased and the attempt the Labor between cooperation period unions and the Wilson the "social by Party government's represented to atmo In contract" had already begun this 1975.57 disintegrate by sector wage union and the effective absence of sphere, strength public to institutions increase combined the bargaining significantly employment cance As came costs associated with reducing the fiscal in determining burden. The
British case in the 1970s thus highlights the previously noted signifi
of public wage formation procedures tiveness of public manpower policies. the voluntary to social contract on mandated the effec
rely increasingly in nature, anti-inflationary on the wages restraint greater satisfaction that this outcome a ers became
to the government began collapse, incomes policies. While chiefly these policies also imposed proportionately of high-paid skilled workers.58 unions The dis labor of skilled
among generated in the of both the incomes factor contributory collapse in the government and the Labor 1979. When government policies on to sector wages restrictions in failed in its attempts private impose in the private sector, the unwill the face of increased union opposition sector unions to shoulder the burden of economic ingness of public rifice alone led to the strikes of the "winter of discontent/'59 to these In response problems, a series of radical 1980s instituted labor market firmly their fears of an electoral emergence Democratic Thatcher directed ends of mass on a neoliberal backlash the Thatcher reforms sac
of the governments that would place the British unpopular has pointed out, reforms and the reduced in 1983. set of reforms and served trilemma by the
path. As Garrett60 against were substantially
unemployment
division in opposition support caused by the foundation of the Social

Party and s neoliberal at all three both were wages its alliance with the Liberals strategy of the points involved an interrelated
labor-market
that were
program lowing perennial
and political. The economic goals of the to labor-market thus al twofold: eliminate (1) rigidities, to become and removing the and labor fully flexible economic of achieving wage restraint in the British labor
problem
57 in Economic "Union Participation Hall (fn. 56), chap. 4;Ward (fn. 56); Hugh Compston, Policy and Britain, 1970-1993," West European Politics 18, no. 2 (1995). in France, Italy, Germany Making 58 and Lloyd Ullman, Unionism, Economic Stabilisation and Robert J. Flanagan, David W.Soskice, Incomes Policies: European Experience D.C: Institution, 1983); William Brookings (Washington, in Ronald Dore, Robert Boyer, and Zoe Brown, "Incomes Policy in Britain: Lessons from Experience," 1994). Mars, eds., The Return to Incomes Policy (London: Pinter Publishers, 59 (fn.l), chap. 5; Hall (fn. 57), chap. 4; Brown (fn. 58). Scharpf 60 and Thatch "The Politics of Structural Change: Swedish Social Democracy Geoffrey Garrett, no. 4 (1993) erism in Comparative Perspective," Comparative Political Studies 25,
536
WORLD POLITICS
market; and (2) to institute fiscal discipline. The political goal was to
weaken servative The the power of the labor movement, the chief obstacle to Con hegemony. political new in the wage-set abandoned all involvement government was to revive made the broken social contract, ting process. No attempt income policies were and wage bargaining, dropped, already relatively to the company moved level.61 Thus, several decentralized, increasingly sources of institutional bias toward solidaristic significant were to low pay removed. Legal and regulatory obstacles wage policies were there was no general minimum wage already limited; for example, as did exist were law in place. And such legal obstacles dis gradually potentially
mantled. The power of the Wage Councils, which had been responsible
for protecting of younger workers the wages and setting a minimum as most in the vulnerable industries retail and catering), was (such wage
significantly reduced. Also abolished was the FairWages

had obliged government in their wages contractors industry.62
Resolution,
collec
which
to pay the prevailing
tively bargained effort to achieve
The widespread privatization of public services, largely justified as an

to also contributed restraint, budgetary increasing trans of low-paid and the incidence wage flexibility By employment. of from services numbers workers the sector, the ferring large public most to the sector in the economy, unionized services private highly itwas that sector, one of the sectors where unions were weakest, hoped service sector wages could be reduced. In many cases this goal seems to cites the example of hospital have been achieved. Ward cleaners who often reductions wage experienced were out contracted cleaning jobs of between to the private 30 and 40 percent when sector.63 The reforms
also had the desirable political effect of weakening

unions.
the public sector
The Trade ernment

61 Colin
unions Union
were Acts
attacked
of the 1980s
s adherence
and directly by the Employment the and were further weakened gov by to policies throughout tight fiscal and monetary
more
of Compromise," inGuido Baglioni and Colin "United Kingdom: The Rejection Crouch, Crouch, eds., European Industrial Relations (London: Sage, 1990); Hall (fn. 56) chap. 4. 62 and Labour Market See Ward (fn. 56); Alice Brown and Desmond King, "Economic Change in Britain and Sweden," West European Politics 11 (July and Dualist Tendencies Policy: Corporatist 1988); Gerda Falkner and Emmerich Talos, "The Role of the State within Social Policy," in Wolfgang or Redefinition? M?ller and Vincent Wright, Western eds., special issue, The State in Europe: Retreat to 'Market Western European Politics 17 (July 1994); Christel Lane, "From 'Welfare Capitalism' Capi in the Labour Markets of talism': A Comparative Review of Trends towards Employment Flexibility Three Major European Societies," Sociology 23, no. 4, (1989). 63 Ward (fn. 56).
EQUALITY, the decade. unions.
EMPLOYMENT, a strictly
BUDGETARY anti-inflationary
RESTRAINT policy, the govern
537
By pursuing
ment placed the entire responsibility

It was
for unemployment
with
the
ployment from a little under 5 percent in 1979 to a peak of nearly 12

percent in 1986. At the same time, union power and did de militancy remove to used the and the cline, many of the government opportunity to workers of the 1970s. rights extended by the Labor governments The economic effects of these reforms were dramatic. All available of wage levels of to those that has the last
commitment that abandoning the government's hoped to full as well as would weaken the unions' employment political power, was a unem in restraint.64 The immediate effect rise inducing wage
show that the U.K. now exhibits inequality sector service and wage growth inequality private comparable It is also the only country of North America.65 in our sample a decline sector service in in exhibited public employment had fallen almost to its 1979 level, largely because of a strong
measures
decade. Nevertheless, by the end of the 1980s, the unemployment level

expansion in private service employment. The of an improved benefits mance wage must
service employment private perfor costs incurred, not terms of be weighed the against just in labor market but also in increased insecurity. The inequality, of the trade union movement in the mid-1980s allowed a substantial and the high threat of unem of cutbacks number
weakening ployment
inworkers' rights and tipped the balance of bargaining power firmly in

to favor of the employer. Rights and maternity protection employment as as and well unfair dismissal for leave, redundancy, protection against were of bud all reduced.66 The simultaneous achievement example, getary case has thus been in the U.K. restraint and employment growth a costs were ul for of class divisions.67 These social by paid deepening ones into for the Conservative timately translated Party, which political
was voted out of office inApril 1997.With

we would tained to see a shift in priorities
the election of New Labor

over
the policy goals con expect in particular on remov in the trilemma, with a greater emphasis some of the labor market since the created in the British ing inequities it A crucial test for the reformed Labor Party is whether mid-1980s.
will be able to achieve this goal without either lifting its self-imposed cap on public spending or inhibiting job creation.
64 Garrett (fn. 60); Crouch (fn. 61); Hall (fn. 56). 65 (fn. 26). (fn. 26); and Pontusson See, for example, Rowthorn 66 Brown and King (fn. 62); Lane (fn. 62); Falkner and Talos (fn. 62). 67Jessop(fn.22).
538
WORLD
POLITICS
Denmark: The Limits to Equality Public Sector Expansion

the 1960s and 1970s During consecutive social democratic solidaristic in Denmark,
and
as in the rest of Scandinavia, to advance their tra sought
governments were
ditional platform of wage equality and employment for all. Unlike

Britain, facilitated wage by centralized "subsidized" higher-than
in
wage policies workers which (in bargaining high-wage for increases and directly workers) average wage low-paid pursued a benefits and flat-rate indexa wage through generous unemployment was a tion system. High achieved growth through rapid employment
expansion of public sector employment (as is apparent inTable 2) and through the provision of social services (such as public day care),which
facilitated this female strategy participation had the desired in the labor market. consequences. Available For awhile at least, earn industrial
ings statistics suggest that between 1963 and 1977 wage dispersion for Danish manual workers diminished by about 54 percent, while in the period from 1970 to 1982 the decline for salaried private employees in
Denmark was a rise service
the labor market increased from 62 percent in 1973 to 74 percent in

1983, public that was achieved almost entirely through expansion of employment. similar
26 percent.68 Meanwhile,
rates of female
participation
in
But in the 1970s the social democratic strategy inDenmark ran into
difficulties to those found in Britain. and On the one hand, forms of payment sys in-house training), pro the
severe tems
combined with a shift in labor demand toward higher-skilled workers,

led to the rise of cross-class ducers room and better-trained centralized coalitions" "flexibility workers?coalitions between export that undermined
of nonstandard the increasing use by employers at labor (aimed increasing productivity
system.69 On the other hand, the government's bargaining was maneuver in circumscribed fiscal for by increasingly policies more made deficit that costly by integration capital-market spending a substantial "risk pre and necessitating raising inflation expectations mium" on interest rates.70
68 are based on data Lenstatistikken inDansk Arbejdsgiverforening, Calculations (Copen published various years). hagen, 69 Ibsen and J?rgen Stamhus, Fra Central tilDecentral Lenfastsattelse See Flemming (From central ized to decentralized wage setting) (Copenhagen: Jurist- og Okonomforbundets Forlag, 1993); Torben and the Breakdown of Centralized Wage Iversen, "Power, Flexibility Bargaining: The Cases of Den mark and Sweden in Comparative Comparative Politics (1996). Perspectivem," 70 in Erik "Denmark: From External to Internal Adjustment," Torben Iversen and Niels Thygesen, Club: The Challenge for and Francisco Torres, t?s., Joining Europe s Jones, Jeffry Frieden, Monetary Smaller Member States (New York: St. Martin's Press, 1998).
equality, In Denmark,
employment,
BUDGETARY
RESTRAINT
539
fiscal
on continued an even more severe constraint however, was met with nature. in in taxation expansion Growing political sector from both business and private and unions, creasing opposition success of the new antitax in the electoral the dramatic Party Progress of 1973 unambiguously election signaled "earthquake" sector electoral costs of continued expansion. This public to take the social democratic courage government the potential to en helped stands tougher dra that
the demands against matic changes policy
sector unions, the most of public although came under the center-right government polices under the new government were
took office in 1982.

Macroeconomic was strictly
subordinated to support a hard-currency policy, the large budget deficit

re reined in, and a series of budget and administrative completely to under control.71 In ad forms was adopted bring public expenditures was and the eliminated the indexation of dition, wages cost-of-living to sector wages for of automatic compensate private regulation public sector wage drift was
restricted and eventually suspended.72 Tripartite no over wages in the new gov and social policies had place bargaining was done to rescue the centralized bar and ernment's strategy, nothing foundation for the the institutional that had been system gaining solidaristic wage policy. was to the social democratic challenge project in electoral Thus, while alignments. by deeper changes preceded solidaristic wage bar the social democratic centralized, strategy?with a commitment to full and engendered employment?had gaining The government's class solidarity, decentralization of the bargaining rationale the economic system and ris for solidaristic lowand new
broad
undermined ing unemployment to the fore distributive between divisions and brought policies those in secure market and between labor high-productivity and those in insecure ones. In Denmark and
in Scandinavia
positions more
in evident of these changes was particularly the manifestation broadly a in the workers low-skilled division between electoral public growing sector. The division sector and in the private workers high-skilled was both over pay relativities the pay of low (that is, over whether should follow those of their higher service workers productivity public
71 See Jesper Due and J?rgen Steen Madsen, N?r der sl?s som i: overenskomstforhandlinger og Organi and organizational sationstruktur (Sealing the deal: Wage structure) (Copenhagen: Jurist bargaining Schwartz, "Small States in Big Trouble: State Reorga og Okonomforbundets Forlag, 1988); Herman in the 1980s," World Politics 46 (July and Sweden New Zealand, in Australia, nization Denmark, 1994). 72 See Peter Nannestad, Danish Design orBritish Disease? Danish Economic Arhus University Press, 1991); Due and Madsen parative Perspective (Arhus: Crisis Policy 1974 in Com (fn. 71), 41, 55.
540
WORLD
POLITICS
in the private sector) and over the need for wage productivity colleagues more concern to sector workers restraint issue of (an exposed private in the public sector). than to sheltered workers
The growing salience of this division is clearly detectable in voting

patterns. were sector in the early 1970s private employees to vote for sector to than slightly likely public employees parties over the left of the social democrats, time the direction of these differ ences shifted and their so that by 1990 the pro magnitudes multiplied, Thus, more while Peoples'
portion of public employees voting for new left parties (especially the
was about three times that of private employ Party) new left of the sectoral supporters changed Correspondingly, profile to from being three-quarters sub being two-thirds private public.73 We mit that the reason for this rise of left-libertarian in Denmark parties Socialist ees. has little to do with to do with the rise of a new everything so to in new bottles, of a rising service economy. Old wine speak. ac Danish The of electoral emerging realignment politics has been of these reforms was not reforms. The purpose by welfare companied old-fashioned postmaterialist distributive conflict and cleavage in the context
to restraint but also to increase labor just impose greater budgetary were sector market and Policies also flexibility private employment.74 com to structure and raise initiated to flexibilize the public sector wage consumer in services and choice. greater through privatization petition More tributed vice recent deregulation to the emergence of business of a more hours for stores has also con ser liberal and consumer-oriented
economy. One should
wage
structure
deregulate some reforms have a In addition, standards. clearly followed by British more Christian re with the introduction of democratic pattern, early not of part-time tirement schemes and facilitation employment, though nearly on the scale seen in the Netherlands (see below). In comparative
not exaggerate the scope of these reforms, however. The to to has been highly resilient and measures change, markets and privatize have been modest public enterprises
73 The figures are based on national private sector division has been analyzed in J?rgen Elklit and Ole Tonsgaard, eds., in Peter cline of Class Voting Revisited,"
election
data. The growing electoral salience of the public "Social Klasse og Parti," extensively in J?rgen Goul-Andersen To Folketingsvalg and idem, "The De (Arhus: Politica,1989); and Karen Siune, eds., From Voters to Participants Gundelach
Politica, 1992). (Copenhagen: 74 A primary target for the reforms was the extremely generous unemployment benefit system. The to government was particularly keen to eliminate what it regarded as union disincentives center-right engage in responsible wage behavior and to reduce the overall financial burden of the system. The re sult has been a substantial reduction in average replacement rates; see Steen Scheuer, "Denmark: Re turn to Decentralization," inAnthony Ferner and Richard Hyman, New eds., Industrial Relations in the 1992). Europe (Oxford: Basil Blackwell,
EQUALITY, perspective, democratic new lines non-social sumed
EMPLOYMENT,
BUDGETARY
RESTRAINT
541
the Danish route, but of division democratic political
greater
a still represents social experience distinctly it also illustrates how this route has engendered in the service and how alternative, economy, to cope with have as the trilemma strategies salience over time.
The Netherlands: Operating Egalitarian Constraints

When compared with Denmark
between
and Britain,
Fiscal
and
of Christian
the strength
democratic political influence in the Netherlands

strategies creation has consistently ployment restraint those of either budgetary our estimation of the trilemma, quantitative restraint and getary egalitarian wage policies labor-market and outcomes.75
is clearly visible in
In particular, the goal of em a lower been assigned than priority we or from would expect equality. As this combination has produced of bud a low capac
ity for employment growth?a problem that has traditionally been dealt with through policies of job sharing and minimization of labor
market participation. the postwar period Throughout in the Netherlands have intervened Christian heavily governments in the wage-setting process, democratic
beginning with the highly egalitarian and anti-inflationary incomes policies of the 1940s and 1950s.76 In the tight labor markets of the
these policies were overtaken however, by wage drift. Faced with set conceded union militancy, inflationary wage increasing employers of the manu the competitiveness tlements that seriously undermined 1960s, facturing sector. As a result, many industries found themselves unable
to compete when the first oil crisis struck in 1973. These events coincided with the formation (in 1973) of the first so
cial democrat-dominated The new government rates started to rise and trial relations crisis, as unemployment tripartite unions trade became and with increasingly negotiations employers on a once it embarked In response, deadlocked. again policy of direct were frozen and in in wage intervention setting. Wages periodically to make use of the creases were controlled. The government continued to pursue afforded by direct intervention egalitarian poli opportunity were reduced both by the imposi Income differentials cies, however. increases and by the inclusion of specific compensations tion of flat-rate
75 until the early 1970s. Christian parties dominated every postwar government 76 in the Netherlands: "Socio-economic Steven B. Wolinetz, Redefining Bargaining no. 1 (1989). Policy Coalition," West European Politics 12, the Post-War
in Dutch government history, under den Uyl. an economic and indus found itself faced with
542 for
WORLD direct wages
POLITICS action and equality social benefits on was taken with
low-wage workers. More the indexation of minimum sector
to the average
private Den
to the crisis was in response strategy Uyl's on constrained Christian democratic by his government's dependence was to it coalition while the goal of pursue partners. Thus, possible the pursuit of a full-scale social democratic strategy based on equality, the was public employment effectively sector to increase schemes employment ran counter to Christian democratic ideals of of state involvement in the economy restraint. (which was and seri voted out
wage.77 choice of economic
expansion large-scale Extensive blocked.78 public overall levels employment the minimization of direct
the goal of budgetary ously threatened In fact, the strategy of the den Uyl government
of office in 1977) left theDutch economy poorly equipped to deal with the second oil crisis in 1979.Wage indexation had undermined the flexibility of realwages so that the shock caused a dramatic doubling of
between 1979 and 1982.79 from 5.7 to 11.9 percent, unemployment, to sector mech of the indexation Meanwhile, wages?a private public sector unions?made anism jealously expenditures by public guarded to control. difficult increasingly a solution to the The unions and the socialists proposed unemploy ment But the use of public sector employment. that advocated problem in its emphsis on the need for job sharing and the creation of part-time re with budgetary that are more compatible (strategies employment awareness an of the political straint), their plan also reflected strength and conserva of Christian liberals, Meanwhile, democracy. employers, a more Democratic tive elements within the Christian Party advocated re of decentralization radical "liberal" route?the wage bargaining, moving link the system of income (including sector and wages, cutting public expenditure. ages), lowering to with the forma The neoliberal gain prominence began position and liberals, under democrats of Christian tion in 1982 of a coalition a strict introduced The new government Luebbers. austerity package a 3 percent sector salaries and cut in that included widespread public labor-market rigidities minimum cutbacks in welfare state benefits. In addition, the system of wage and
77 A Passive Social Democratic and Uwe Becker, "The Netherlands: Ibid.; Kees Van Kersbergen Ruled Society" Journal of Social Policy 17, no. 4 (1988). State in a Christian Democratic Welfare 78 Dietmar Braun, "Political Immobilism and Labor Market Performance: The Dutch Road toMass " and Becker (fn. 77). Journal of Public Policy 7, no. 3 (1987); van Kersbergen Unemployment 79 and Francisco Erik Jones, "The Netherlands: Top of the Class," in Erik Jones, Jeffry Frieden, States (New York: St. Club: The Challenge for Smaller Member Torres, eds., Joining Europe's Monetary Martin's Press, 1998).
EQUALITY, benefit these linkages changes was
EMPLOYMENT, removed.80 resulted
BUDGETARY
RESTRAINT
543
actually
in the Dutch
substantial
case. Certainly by 1990 (when our time series end) no

in overall
there is little indication that However, in a of differentials earnings broadening
could be detected.81 earnings differentials at to This the continued least partially attributable gov stability may be ernment of extensions of collective agree practice imposing mandatory on nonunionized ments in firms, since collectively wages agreed-upon statu the lowest grades have tended to be considerably than the higher minimum.82 tory change Dutch unemployment performance improved substantially in the the
second half of the 1980s. But itwould clearly be incorrect to attribute

this performance trade-off between unemployment in part-time cilitated by as "disabled" to the pursuit of a neoliberal and equality. in employment to rates of increase is largely attributable extremely high in the services sector.83 It was also fa female employment on strategy based In fact, the reduction
a very substantial rise in the number of unemployed listed a and by early retirement.84 Thus, of the large component an in in increase represents improvement job employment performance a exit in full and increase labor-market rather than sharing genuine employment problem emphasis to the solution The Dutch equivalents. unemploy in nature. thus remains essentially Christian democratic sharing in and exit rather than on overall employ
time ment An
on work
ment creation allows for high levels of equality and fiscal discipline and
for simultaneous New unemployment. are to become for job likely strategies sharing as a concomitant in all Christian countries democratic reductions more necessary to the increas
ing political difficulty of pursuing the more traditional Christian dem

ocratic the labor strategy of reducing by minimizing unemployment on aris democratic models traditional Christian supply. The pressure issues is from around of women's al mobilization rights ing political recent in in labor-market visible the where Netherlands, years ready
80 With the election of a socialist government in 1990, minimum wages were recoupled with aver
over the last decade is also noted in Jelle Visser, stability of earnings differentials and Labour Industrial Relations, Unions, Wages "Two Cheers for Corporatism, One for theMarket: Markets in the Netherlands," British Journal of Industrial Relations (forthcoming). 82 Ibid. 83 between 1985 and 1990 was percent of the increase in service sector employment Seventy-five the exception of Belgium, no other EC country recorded a value of more than 43 per part time.With are female. Cf. Daniele cent (Germany). Eighty-six in the Netherlands percent of part-time employees in the EC (Brookfield, Vt.: and Robert Plasman, Atypical Employment Olivier Plasman, Meulders, Dartmouth Publishing Co., 1994). 84 an 13 percent By 1989 astonishing (fn.79). of the total labor force was listed as worker disabled; Jones
age wages. 81 The remarkable
544
WORLD POLITICS
policy has displayed an increasing emphasis on raising the level of

labor-market participation.85
Conclusions
The in this paper clearly supports the existence of a presented em intersectoral wage the of and between expansion equality in the private services sector. Given the declining capacity of ployment sector to generate in most OECD coun the manufacturing employment a existence with the of this trade-off tries, governments presents or between the of trilemma, choice, goals earnings equality, three-way evidence trade-off can restraint, and employment growth budgetary growth. Employment a at cost in services of the levels be achieved sector, higher only private or in the services of wage sector, at a cost either of inequality; public to the taxes or of Strict adherence goals of bud higher higher deficits. getary restraint and wage in an inferior employment equality simultaneously will therefore result performance.
In analyzing the paths followed by individual countries in the face of

socio these choices, of ideological the influence legacies and existing clear. Traditionally countries dominated economic institutions becomes a commitment to equality and employment by social democrats display to sacrifice restraint. The pursuit of this and a willingness budgetary
ideological agenda has been supported by the institutionalized system

of centralized countries solidaristic wage the goals of equality with visible In the Christian democratic bargaining. and budgetary restraint have assumed costs in terms a by with of employment system that combines tax codes and other growth. central
importance primary outcome This has been
facilitated
institutions ized wage-bargaining policies route labor-market The neoliberal aimed at discouraging participation. outcome rests on the free has of and the associated markets, operation in and restraint been employment by accompanied growth budgetary levels of inequality. creasing
While
recognizing the significance of ideological and institutional

in
outcomes associated with the the distributional legacies determining to that institutions the paper also seeks trilemma, existing emphasize an new are themselves under and ideological entirely placed platforms set of strains by the growing
85 Robert Industrial C. Kloosterman Employment
salience
of the trilemma.
The
emergence
Trajectory
ofWelfare "Three Worlds in the Netherlands
State and the Post Capitalism? The Welfare after 1980," West European Politics 17, no. 4
(1994).
EQUALITY, of a stark new which have ment did not cal tension
EMPLOYMENT, between
BUDGETARY
RESTRAINT
545
trade-off exist
in the golden
expansion, equality and employment creates a criti age of manufacturing, of social democrats. While we sector expanding public employ the goals of equality and between limits to the feasibility of this strategy,
in the
demonstrated can obviate there
ideological platform that a strategy of the need are to choose
political tax revolts and divisions between the pri by the Danish case also vate and sectors. The Danish the strains im public highlights on solidaristic wage between conflict by distributional posed policies workers. and highlow-productivity For Christian ment creates democrats a different kind the trade-off of tension. between Christian
employment, as is evidenced
equality and employ have tra democrats
a on low priority creation, relatively placed employment on a to of force labor strategy prevent minimizing relying participation rates from Christian democratic rising. In traditionally unemployment are the strains associated with the trilemma countries, therefore, likely to become most visible where to designed discourage partici policies case it appears that In the Dutch infeasible. pation become politically ditionally policy sponse tunities choices re may have begun to narrow in this way. The dominant so far has been an to share limited oppor attempt employment rather than the alternative of increasing earnings inequality or
we observe arises from distri change that case demon at the the British butional However, margin. struggles to strates of alter the the proactive governments radically capacity to outcomes institutions associated and hence affect the distributional with and deregulating the power of unions By reducing ser to the in increase Conservatives Britain markets, private managed in vice sector employment. the increase dramatic However, inequality to the climate and poverty that accompanied these changes contributed the trilemma. of political discontent tives from office. The Danish that led to the recent cases removal of the Conserva
the public sector. expanding Much of the institutional
of the po clear evidence thus provide so and neoliberal litical limits of the social democratic strategies. The costs associated cial and political the new strain of Christian with have yet to be in the Netherlands democratic policies being pursued one is well the Dutch advised not to declare fully assessed. However, and British success. many of the overt unemployment Although unqualified and exclu have been dealt with, labor-market marginalization problems a to So while sion continue economy. fundamentally plague the Dutch cure an
546 Christian democratic
WORLD POLITICS
model some neoliberal spiced up with the trilemma and continues has not overcome has been re
to forms, the Netherlands in the OECD area. be one of the worst employment performers One final point to note is that the severity of the trilemma depends on the continued to increase in the services sector. inability productivity in services productivity allow prices to fall and wages would as in the to rise Where age of manufacturing. simultaneously, golden new can actors and economic governments strategies successfully adopt to that of manufacturing, services closer in line with bring productivity and the distribu the starkness trade-off of the employment equality Increases
tional conflicts that surround itwill be reduced. The

such
issue of whether
is intimately tied to the emer exist, which we believe strategies a critical one for is for therefore of international markets services, gence future research.

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EQUALITY, EMPLOYMENT, AND BUDGETARY RESTRAINT

from newly industrializing sal rise in the level of wage

50 (July 1998), 507-46

508 This paper advances

In contrast most past

production to one dominated by (shel

growth fore, ifwage only

of higher tax rates or of borrowing (both implying lack of budgetary

employment timate the oriented Netherlands, ciated with

The Argument: The Economic

the period income and to a combi

of manufacturing will productivity compensate for example,

consumption. no longer result for their labor-saving have found a

of employment growth. This fact is brought out clearly inTable 1,

the role previously

resembles economy the transformation with

predominantly the shift in sectoral

of the agrarian Unlike

1960). 7 For excellent

1 Table in Thirteen and Decade Sector

United Kingdom United States

SOURCE: OECD International

slow or tomask declining quality.Although

portant m?l and Bowen10 that service

and although there the pathbreaking branches,

growth.11 waiters more

production can serve more Teachers customers,

productivity times technological vice

EQUALITY, paid occupations, increase demand the responsibility

panding public by social democratic

and/or public debt must be increased to finance the growing public

the main purpose of the typology is simply to elucidate the political

WORLD POLITICS Fiscal discipline

Earnings_Employment Social Democratic 3

ployment. Ideologically, this model

is grounded in a belief that freely

neoliberal ideology is combined with awork ethic that underscores

also emphasizes budgetary on individual equality and less the neoliberal

restraint, but it places and free self-reliance has its origins

BUDGETARY thought against as well

community, the dehumanizing and as the against potential and freedom as of as

of state power on the independence life.20 Although is recognized society

20 Kees van Kersbergen, don: Routledge, 1995). 21 It has been suggested

A Study of Christian Democracy

and theWelfare State (Lon

WORLD employment?or to understand

POLITICS achieve only modest success on all

In order countries understand to

projects.23 tends to perpetuate The markets Christian

numbers of people in insecure and poorly paid jobs.

professions The downside

paid jobs for allwho arewilling

to work, thus producing problems of

turns row, the trilemma can choose governments

into a difficult either

private public wage

15 (21) 19 17 (23) 75 20 13 (19) 26 10 (18) 21 7(15) 17 8(17)

private public wage

private public wage

private public wage

private public wage

21 18 (24) 71 20 22 (27) 76 22 15 (21) 60 27 11 (17) 54 21 8(17) 18 9(20)

private public wage