Policy by Contract: electoral cycles, parties and social pacts, 1974–2000

Abstract

Persistent cross-national differences in the economic performance among rich democracies flies in the face of both neo-classical macroeconomics, which sees no positive role for government, and the lack of evidence for political business cycles in economic outcomes. To provide a more nuanced understanding of how elections, parties, and interest groups interact to produce policies, I examine "social pacts": formal policyfor-concession bargains between governments, union federations, and employers. I propose a model in which in which pacts are attempts to make policy promises credible to voters. The model predicts that pact emergence should follow the electoral cycle and respond to the partisanship of government. Using an original data set of social pacts, this paper investigates the model's predictions along with both domestic and international variables purported to be associated with pact onset. While the findings confirm the importance of economic conditions, especially unemployment, in determining the onset of pacts, political considerations are also important. The electoral cycle and partisan concerns have a strong influence on the timing of pacts. The findings point to one avenue through which electoral cycles affect macroeconomic policy.Keywords: economic policy, political business cycle, wage bargaining, social pacts, event history models 1 Beginning with the stagflation of the 1970s and continuing through the subsequent process of increased economic integration, rich democracies confronted economic challenges that traditional Keynesian demand management is not well-prepared to address. Policy approaches to these problems have varied across time and space. Policy makers have, at times, turned to interest rate policies to dampen inflation at the cost of high unemployment and severe economic downturns. Governments have legislated directly over wages and prices. Others have drastically overhauled their entire political-economic institutional structure. Some attempted negotiated agreements with peak associations of labor and capital-social pacts-in an attempt to liberalize labor markets or gain control of wage demands, prices, and government budgets. Neoclassical economic theory, with its reliance on assumptions of rational expectations and perfectly competitive labor and product markets, has little so say about government actions of this sort; government policy can only induce temporary fluctuations that are ultimately detrimental. The new Keynesian macroeconomics, however, relaxes the assumption of perfectly competitive labor markets, opening a channel for policy-makers and wage bargaining agents to affect the real economy (Iversen and Soskice, 2006;Soskice, 2000). With inflation fears returning and severe economic problems again looming large, understanding the conditions under which governments and economic actors can come to an agreement undergirding good economic performance is critical. These pacts are therefore of special interest.A parallel literature on the "political business cycle" also eme...

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