A number of recent studies of economic performance among the OECD countries report that those countries which have strong unions and social-democratic governments and those countries which have weak unions and right-wing governments both do better in terms of growth, investment and unemployment than countries in which the political patterns are more mixed. What is not clear from this research is why this would be the case: is it because governments with different ideological orientations choose different policies in the presence of strong and weak unions or is it because the same policies have different consequences when unions are strong than when they are weak? This investigation focuses on fiscal policies, in particular, on different kinds of tax policies. Economic theory leads to the belief that investment can be financed by maintaining a high level of after- tax profits or by using taxes on income from capital that are neutral in their effect on investment. Given this alternative, one would expect that governments with different ideological orientations would use different tax policies. In particular, that social-democratic governments would impose investment-neutral taxes on incomes from capital and develop extensive welfare services. The effect of taxes, however, depends on the power of unions. When unions are strong, they can adjust wage rates in response to taxes and transfers, increasing their demands when incomes from employmnet are taxed and decreasing their preferred private wage in response to transfers and welfare services. Weak unions can rarely do the same. A database comprised of political and economic data on OECD countries from 1960 to the present will be gathered for this research. The investigator then analyzes these data to assess which of the aspects of unions do in fact matter in influencing investment, union wages, union vs. non-union wage differentials, as well as private and public employment. The investigator will examine whether governments with different orientations, facing unions with different strength, do in fact choose different fiscal policies. The effects of these policies on investment, economic growth, wages, transfers and welfare services, and income inequality will also be evaluated. The contribution of this research will be twofold. First, the project should illuminate the causes and consequences of government policies. Studies of economic performance have thus tended to jump from political conditions to economic outcomes, leaving the entire policy process in a black box. The purpose of the research is to determine why governments choose different policies and if the same policies have different consequences given the power of unions. Secondly, the research should identify what it is about unions that matters: from what do they derive the strength to act strategically vis-a-vis employers and governments. More generally, this investigation should contribute to a more realistic understanding of the economy as a system of strategic interaction among governments, firms and unions, acting within an institutional framework.
