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Political Institutions, Partisanship, and Inequality in the Long Run

by Kenneth Scheve and David Stasavage. Reading for Tuesday, 6 February.

It has been widely suggested by political scientists that institutions like centralized wage bargaining and factors like government partisanship are correlated with differences in income inequality between advanced industrial countries. The emergence of centralized wage bargaining and a predominance of left political parties may in turn, it is argued, be favored by an electoral system based on proportional representation. There is empirical evidence for the period since 1970 which shows that each of these variables is correlated with income inequality. We make use of new data on top income shares to test these propositions over a much longer time period, the entire twentieth century. Our empirical results provide little support for the idea that either left government or proportional representation are correlated with income inequality over this period. Further, although we find some evidence of a negative correlation between centralized wage bargaining and income inequality in the long run, even this correlation is sensitive to the exact specification. We then show that a closer look at the introduction of centralized wage bargaining in individual countries during the 1930s and 1940s reveals that in countries that moved to centralize wage bargaining, income inequality was already trending downward well before the institutional change, and the move to centralized bargaining did not alter this trend.  We argue in the conclusion that our results call for a reinterpretation of the extent to which an institution, such as centralized wage bargaining, can have a causal effect on an outcome like inequality. 

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