Dualism and political coalitions: Inclusionary versus exclusionary reforms in an age of rising inequality

Deindustrialization and the decline of Fordism have undermined the economic complementarities that existed between skilled and semi-skilled workers. The result has everywhere been a decline in coordinated wage bargaining and unionization rates, and a notable rise in labor market inequality. Yet, the political responses have been very different. In some countries rising inequality has been exacerbated by complete deregulation of labor and product markets; in others regulations remain extensive while insider-outsider divisions have been allowed to grow deeper; in still others governments have compensated losers to a considerable extent through increased transfers and active labor market policies. This paper argues that the three paths of reforms reflect differences in underlying political coalitions, which can be analyzed in a two-dimensional policy space consisting of employment regulation and redistribution. Coalitional patterns are a function of the pre-existing industrial relations institutions and the party and electoral system. The argument helps explain the observed patterns of reforms and inequality across advanced democracies.