Redistributing under fiscal constraint: Partisanship, debt, inequality and labour market regulation

Abstract

Labour market regulation varies significantly, both within and between developed democracies. While there has been extensive research and debate in economics on the consequences of labour market regulation, the political causes for levels and changes in labour market regulation have received less scholarly attention. This article investigates a political economy explanation for differences in labour market regulation building on a theoretical argument that labour regulation can be used as a nonfiscal redistribution tool. Consequently, partisanship, the demand for redistribution and government budget constraint jointly determine whether labour market regulation will increase or decrease. Consistent with this argument, panel analyses from 33 Organisation for Economic Co-Operation and Development countries reveal that labour market regulation increases under left-wing governments that face increased market inequality and high government debt.