Paper prepared for the ECPR Joint Sessions workshop

‘The Politics of Skill Formation: Institutions, Actors, and Change’

14-19 April 2009 in Lisbon

Partisan strategies and de-industrialization

Carsten Jensen

Department of Political Science

University of Aarhus

DK-8000 Århus C

Phone + 45 89 42 11 28

E-mail: carstenj@ps.au.dk

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Abstract

The paper investigates the partisan strategies to rising de-industrialization in mature welfare states.

It presents a theory and empirical test of how rising median voter risk exposure leads governments

to increase spending on transfers, which generate immediate protection, and education, which create

long-term re-skilling. Critically, however, governments will choose to expand those programs that

meet the preferences of their core constituency best. Because education is much less redistributive

than transfers, right-wing governments will increase spending on the former and left-wing

governments will increase spending on the latter. This partisan behavior is accentuated by the fact

that expansion of the overall budget is limited due to fiscal austerity and that governments therefore

have to more actively prioritize one over the other. In sum, by integrating the median voter

preference for insurance with the partisan preference for redistribution into a single model, the

paper promises to reconcile the theory of de-industrialization with the power resource literature.

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Partisan strategies and de-industrialization

Welfare state provision expanded tremendously in the first decades following World War II and, as

documented by a number of recent studies, de-industrialization has been one of most important

drivers of this development.1 With fewer individuals employed in agriculture and industrial

production public demands rose for social protection against the risk of ending up with redundant

skills, leading politicians of all party colors to expand provision (Iversen and Cusack 2000; Iversen

2001; 2005). As observed by Pierson (2001), de-industrialization is one of main reasons why

welfare programs have been ballooning and, as an unintended consequence, indeed why current-day

welfare states are now in permanent fiscal austerity.

While the process of de-industrialization has been slowing down in recent decades it

has by no means been brought to a halt. Since 1980 the loss of jobs in agriculture and industry has

exceeded 8% of the total workforce (cf. Figure 1 below). Compare this yearly drop of around .4%

with that from 1961 to 1980 of .5%, and one discovers that there is no reason to expect that de-

industrialization has stopped playing a significant causal role in modern-day societies. Following

this, the paper asks how the continuing process of de-industrialization is influencing welfare politics

in mature welfare state, i.e. in countries where across-the-board expansion is no longer a viable

solution to public demands.

The two most obvious routes to social protection against de-industrialization are either

to provide social transfers, which create immediate protection, or education, which allows for up-

grading of skills on the longer run. While both transfers and education can function as a buffer

1 The paper has benefitted from the helpful comments of Michael Becker, Michael Donelly, Henning Finseraas and

Jonas Pontusson.

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against skills redundancy – arguably a mix between the two is optimal – we suggest that left- and

right-wing governments will systematically prioritize one over the other: left-wing governments

will be expanding transfer programs, whereas right-wing governments will be expanding public

education.

The diverse partisan responses to de-industrialization are caused by the different

redistributive profiles of the two types of programs. As documented in a long line of studies,

education is in fact among the least redistributive welfare programs. This is so not only because it is

one of the most universal programs in existence, allowing access for both low and high income

groups, but also because high income groups systematically use public education more than low

income groups. Transfer programs, on the other hand, are generally much more targeted and, as a

consequence, also more redistributive (Le Grand 1982; Gooding and Le Grand 1987; Shavit and

Blossfeld 1993; Pfeffer 2008). As left- and right-wing governments are forced to make a choice

between the two types of programs – the former because they cannot have it all in the era of

permanent fiscal austerity, the latter because they have to provide something to win the median

voter – each will choose the type of program that meet the preferences of their core constituency

best. For the left-wing governments this will be the transfer programs and for the right-wing

governments it will be education.

It turns out, in short, that there by closer inspection are clear partisan effects of de-

industrialization, but in somewhat unexpected ways. This is documented in a time series-cross

section regression analysis on data from 17 countries between 1980 and 2001. The finding runs

against common wisdom in the welfare state literature that expects left-wing parties to be associated

with higher spending on both education and transfers. While this might have been true historically,

we show that this no longer is the case and that the relationship is the opposite of the one normally

anticipated when it comes to education. Based on this, the final part of the paper discusses the

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implications for both theories of de-industrialization and power resources, i.e. the classic ‘partisan

matters’ argument. It is in particular highlighted how the preferences of specific parties cannot be

presumed to be invariant across different programs and time as the social context changes.

Appreciating this insight may help move the welfare state literature forward and reconcile those

theories that are expecting that policy is driven by preferences for insurance against skill

redundancy and those that expect redistributive preferences to matter more.

1. De-industrialization and welfare state growth

It is a key observation in the mainstream welfare state literature that the first wave of welfare state

building was initiated in the decades around 1900 as a response to the new risks generated by the

industrialization that took place at that time (Stephens 1979; Korpi 1983). Although the response

varied with the political parties in power, all Western countries saw substantial expansion in this

period. As noted by Iversen and Cusack (2000), it is therefore not the least surprising that the even

larger welfare state expansion in the post-World War II decades coincided with the encompassing

process of de-industrialization, understood as the decrease in available jobs in agriculture and

industry. It is, in fact, their argument that – just as was the case half a century prior – the structural

changes of the labor market are one of the main causes of the welfare state boom.

The theory of de-industrialization taps the varieties of capitalism approach in

assuming that social policy preferences of the public are predominantly determined by the skills

specificity of individuals. When individuals possess skills that are in risk of becoming redundant

they will be more supportive of extensive welfare spending because such spending offers protection

in the event of unemployment (Estevez-Abe et al. 2001; Iversen and Soskice 2001). De-

industrialization entails a continuing reduction in available jobs in agriculture and industry, which

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following this logic is likely to lead to more pro-spending preferences among the public because the

skills required for jobs in the growing service sector often will be very different from the skills

required for the old jobs. Even in nations where the workforce is endowed with relatively general

skills, like the United States or Canada, this basic skill gab is likely to be of crucial importance as

noted by Iversen and Cusack (2000, pp. 326-327):

‘Whereas skills within agriculture, manufacturing, or services are typically

transferable to some degree, most skills acquired in either manufacturing or

agriculture travel very poorly to services occupations. Even low-skilled blue-color

workers find it exceedingly hard to adjust to similarly low-skilled service sector jobs

because they lack something that is vaguely referred to as social skills.’

The primary element of the theory of de-industrialization is what it dubs the joint structural effect,

i.e., the common economic shock hitting the labor market as a consequence of de-industrialization

and which raises the risk exposure of the median voter. Because both left- and right-wing parties are

forced to capture this voter, both parties will be advocating increased welfare spending. The key

expectation of the theory therefore is that both left- and right-wing governments will be associated

with welfare expansion – a proposition that sets it apart from the conventional power resource

theory (Stephens 1979; Korpi 1983). Normally measured as either total government spending or

government transfers, it has been documented empirically that de-industrialization from the 1960s

to the early 1990s had a direct effect, unmediated by partisan governments, on the size of Western

welfare states (Iversen and Cusack 2000; Iversen 2001; 2005).

The major contribution of the theory of de-industrialization undoubtedly is the

highlighting of the joint structural effect. However, adding to this, it is observed that left-wing

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parties will often try to ensure that the rising spending in particular will be allocated to programs

that have strong redistributive effects. This expectation resonates with the power resource theory

that posits that the fundamental preference of left-wing parties is to promote economic

redistribution because the core constituency of these parties is low income groups. Right-wing

parties are, conversely, trying to promote programs that entail as little redistribution as possible as

their core constituency is high income groups (Stephens 1979; Korpi 1983; Bradley et al. 2003).

According to the theory of de-industrialization, these differences are likely to lead

left-wing parties to favor government consumption. Yet, while the argument that left-wing parties

will try to maximize redistribution is highly valid, the expectation that this would imply a

preference for consumption over transfers is less well-founded. Above all, as we will discuss below,

transfer programs are in general more redistributive than consumption and, in particular, education.

So although left-wing governments historically may have been associated with higher government

consumption, especially of elderly care and childcare, this is hardly a result of wanting more

economic redistribution. Much more likely, it is the outcome of a preference for defamilisation, i.e.,

the reduction of dependence of individuals, notably females, on the traditional family structure –

and the explicit opposition to this policy by right-wing parties (Esping-Andersen 1999). There is

also a certain counter-intuitiveness about the idea that de-industrialization will lead left-wing

governments to expand consumption because these new service jobs (e.g., doctors and nurses) will

be of the exact kind that cannot be managed by unemployed farmers and industry workers. At least

such a notion entails that the government first of all provides re-skilling via education – the exact

point we will be making below.

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2. Partisan strategies for coping with de-industrialization under fiscal austerity

The existing work on de-industrialization has so far overwhelmingly focused on the period of

welfare state expansion. Even though the empirical studies have included data until the early 1990s,

the studies have never decomposed the time period so any period effect is likely to have been

washed out. While, as can be seen from Figure 1, this is not a problem due to any exhausting of de-

industrialization, which continues to unfold, albeit at a slightly slower pace and with less variation

between the nations, it is curious nevertheless because the economic environment has altered

dramatically.

FIGURE 1 ABOUT HERE

As pointed out by Pierson (2001), the past three decades has been an ‘era of permanent austerity’

where the previous policy of across-the-board spending as a solution to social problems is no longer

feasible. Paradoxically, part of the fiscal hardships has come about because of previous decades’

willingness by governments of all party colors to respond to de-industrialization by letting the state

step in as a buffer. As a consequence of this past generosity, governments are now in a situation

where it becomes much more important to prioritize between the various programs. In this section

we start out by discussing the two most obvious solutions to rising de-industrialization in modern

societies, namely transfer programs and education. Following this, the partisan strategies are

outlined.

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2.1. Policy solutions to de-industrialization

As emphasized by the previous work on de-industrialization, the major response to rising median

voter risk exposure by governments of all party colors has been to expand in particular transfer

programs (Iversen and Cusack 2000; Iversen 2001; 2005). Expansion of these programs intuitively

makes a great deal of sense when trying to protect the population against loss of skills because the

provision of, for instance, unemployment insurance and old-age pensions generates immediate

security for the individual. Essentially, of course, transfer programs seldom provide a long-term

solution to the problem of skill redundancy because it does not alter the skills themselves. There

only exists one type of welfare program that has the capacity to ensure such large-scale changes in

the skills distribution of society, namely education.

Education is by its very nature aimed at changing the skills of individuals, which sets

it apart from all other government programs.2 To workers in precarious positions on the labor

market, education may allow obtaining skills that make shifting from industrial to service

production feasible. Extensive public education may also allow children of workers with either low

or very industry-specific skills to move to different segments of the labor market than their parents

(Ansell 2008). Thus, assuming that workers are both interested in securing immediate protection as

well as more long-term social mobility of themselves and their children, it is arguably to be

expected that the optimal protection against de-industrialization entails a mix between transfer

programs and education.

While both transfer programs and education may serve the same insurance function,

they have very different redistributive profiles. Given that both are paid for via progressive taxes,

2 With the exception of active labor market policy, but this, however, is, partly, a much more recent type of policy only

gaining wide popularity in the 1990s and, partly, of a much smaller magnitude than public education.

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the main distinction stems from how targeted the benefits are. Education is characterized by being

one of the most universal welfare programs in the Western world with public services, often free of

charge, provided to all quarters of society (Huber and Stephens 2000). Compared to this, almost all

transfer programs are considerably more targeted at individuals with low income; even the arch-

typical ‘universalist’ old-age pensions of Scandinavia are in fact to a large extent means-tested

(Immergut et al. 2007). The fact that the general need for education is related to the lifecycle

whereas the need for transfer programs mostly is related to the economic cycle underlines the

difference: those individuals most at risk of losing their jobs, i.e. low income individuals, are also

the ones most likely to enjoy the protection of core transfer programs (Cusack et al. 2006).

Consequently, as noted by Goodin and Le Grand (1987, p. 215), ‘in egalitarian terms

[…] the beneficial involvement of the non-poor in the welfare state is not merely wasteful – it is

actually counterproductive. The more the non-poor benefit, the less redistributive (or, hence,

egalitarian) the impact of the welfare state will be’. When it comes to education this basic

mechanism is enhanced by the fact that high income groups not only use this service as much as

low income groups, but in fact use is even more. This point is forcefully made by Le Grand (1982)

in a study of the net benefits received by different income groups from the state, as well as a series

of studies of the impact of education on social mobility. The reason is fundamentally that a full

utilization of public education demands a large amount of cultural capital, which is something that

disproportionately favors members of the high income group (Shavit and Blossfeld 1993; Pfeffer

2008).

Although the argument that targeted programs are more redistributive than non-

targeted is well-rehearsed, some authors argue that the relationship is in fact the reverse. Korpi and

Palme (1998) have introduced the notion of a ‘paradox of redistribution’ where the inclusion of the

middle income groups has created more support for welfare provision historically. This might

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explain why universal welfare states like the Scandinavian have bigger budgets and generate more

redistribution than the residual welfare states in the Anglo-Saxon world. Larsen (2008) has recently

corroborated the argument by showing that the attitudes towards the poor in universal welfare states

are considerably more benevolent than in other types of welfare states.

As it is, the two positions do not need to be mutually exclusive. The paradox of

redistribution is characterized by, first of all, being a macro-level phenomenon. That is, it concerns

the entire set-up of the welfare state rather than individual programs. In Scandinavian welfare states

one does on average find less targeted programs as well as more redistribution, but that does not tell

us that much about the effect of individual programs and the partisan strategies related to them. The

argument does, secondly, not presume that left-wing governments have actively pursued universal

programs. In fact, as documented by Esping-Andersen (1985), the universal welfare state type

emerged because Scandinavian left-wing parties had to compromise with other political parties to

get any programs enacted. Yet, their preferred programs where often targeted because that would

benefit their core constituency most. It is, in short, entirely consistent to assume that left-wing

governments will be focusing on targeted programs and still find the pattern documented by Korpi

and Palme (1998) and Larsen (2008).

2.2. Partisan strategies

Following the theory of de-industrialization, political parties are expected to try capturing the

median voter. As de-industrialization creates a joint structural shock on the labor market, increasing

the risk exposure of the median voter, both left- and right-wing governments will respond by

expanding spending. As just outlined, there are basically two policy solutions that make sense in

order to meet the new social risks, namely to provide more transfers or more education. Both are

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arguably valid ways of trying to meet public demands. While no modern countries ever would rely

solely on either one of the two, the different redistributive profiles of the programs means that left-

and right-wing governments are expected to favor different programs: To left-wing governments

transfer programs will be the first choice-policy and education the second choice; to right-wing

governments education will be the first choice-policy and transfer the second choice.

Figure 2 illustrates the intuition behind the partisan strategies. Line a in Panel A

shows the risk distribution at the initial situation. As assumed in the literature, and documented

empirically by Cusack et al (2006), there is a negative relationship between risk exposure and

income, with low income groups being more at risk of ending up with redundant skills than high

income groups. As the joint structural effect of de-industrialization sets in, the risk exposure is

raised for all groups to line b (currently we assume that the effect is linear). This increases the risk

exposure of the median voter, which triggers the policy changes studied in Panel B. Line c in Panel

B is the budget lines of the government in the initial situation. Line d is the total budget constraint

imposed. That is, it is not possible to spend more money than that represented by budget line d. On

the vertical axis in Panel B the spending on first choice-policy is outlined and on the horizontal axis

the second choice-policy is outlined.

FIGURE 2 ABOUT HERE

Looking at the response of the partisan governments, we see, first, how the joint structural effect

forces an expansion of the entire budget line c outwards, ultimately till it meets the budget

constraint at line d. Second, as the budget line is pushed outward there will be a tendency to let the

expansion benefit the first choice-policy. This entails that left-wing governments will prioritize

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expansion of transfer programs, while right-governments will prioritize expansion of education.

This leads to the first and most important hypothesis of the paper.

H1: De-industrialization will lead right-wing governments to expand educational spending and left-

wing governments to expand transfer spending.

In Panel B we assume for reasons of simplicity that there is room for expansion that can fully meet

the rising median voter risks, entailing that there is no trade-off between the first and second choice

policies: De-industrialization leads to expansion of the first choice policy, but does not influence the

provision of the second choice policy. Yet, given the fiscal austerity that many nations has found

themselves in since the late 1970s, this seem like a heroic assumption. More likely we may expect

there to be a certain trade-off between the two policy solutions as politicians are actively

discounting one on account of the other to make ends meet. That is, as de-industrialization leads

right-wing governments to expand educational spending it simultaneously lead them to curtail

spending on the transfer component and vice versa for the left-wing governments. In the extreme

situation where it is impossible to expand further, i.e., the budget line of the government is equal to

the budget constraint, there is only room for meeting public demand by shifting spending from one

policy area to the other.3

FIGURE 3 ABOUT HERE

3 Needless to say, governments may choose to curtail spending on third programs, but it lies beyond the scope of this

paper to deal with this much more encompassing issue. The logic of the argument holds as long as at least some trade-

off takes place between transfers and education. Given the sheer size of these two programs this is not a particularly far-

fetched assumption.

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It is well-known that left-wing governments are much more common in some countries than in

other ones, presumably due to the highly rigid electoral systems with proportional representation

systematically biasing government formation towards the left-wing and Majoritarian systems

biasing towards the right-wing (Iversen and Soskice 2006). It is also well-established that long

spells of left-wing government in turn lead to a much larger portion of the GDP being allocated to

social welfare programs in the postwar decades, all else equal reducing the room for further

expansion (Huber and Stephens 2001). Figure 3 shows the relationship between the cumulative

share of left-wing governments since 1946 and total social expenditure defined as all cash benefits

and benefits in-kind including education between 1980 and 2000. The bivariate correlation is .68.

This suggests that left-wing governments on average might be more inhibited than right-wing

governments in terms of expanding overall spending because the initial budget line c is closer to the

budget constraint d than it is for right-wing governments. The de-industrialization-induced trade-off

between transfers and education is, in sum, likely to accentuate the partisan strategies of both left-

and right-wing governments. Yet, because left-wing governments on average preside over bigger

initial budgets than right-wing governments the trade-off ought to be more severe for the left-wing.

This is the second hypothesis.

H2: The trade-off between transfers and education will enhance the partisan strategies. It will do so

especially for left-wing governments.

Figure 2 outlines the basic logic of partisan strategies, but assumes that the joint structural effect is

linear. In reality, however, this is often not the case because de-industrialization will change the

shape of the risk distribution making those already exposed most even worse off (Iversen 2001).

Consequently, at relatively low levels of de-industrialization, the median voter has not yet been

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affected, entailing that right-wing governments are not forced to act and left-wing governments are

not required to prioritize all that heavily. This logic is illustrated in Panel A with the shaded line e

where the only movement takes place to the left of the median voter. Essentially this means that the

divergent partisan strategies should become more pronounced as de-industrialization unfolds and

gradually comes to affect the voters holding the median position. This is the third hypothesis.

H3: The partisan strategies will be accentuated by de-industrialization.

Figure 1 above showed the development in de-industrialization. It is evident from the figure that de-

industrialization has been unfolding in both the 1980s and 1990s, but Figure 1 also makes it clear

that that there has been convergence between the nations. In 1961 the standard deviation was 7.2,

dropping to 5.8 in 1980, 4.9 in 1990 and 3 in 2000.4 Especially the 1990s saw a marked

convergence as the laggards caught up with the front-runners since there seem to be a ceiling effect

at c. 85% de-industrialization that no countries pass. This is important because rising de-

industrialization is the motor of the argument presented here. As fewer countries actually

experience rising de-industrialization, the argument must be expected to lose explanatory power

when applied to the entirety of the Western world. This is the fourth and final hypothesis.

H4: The effect of the partisan strategies is diminished over time.

4 Part of this is driven by Australia that reports very low levels of de-industrialization until 1996, but the point is valid

even when disregarding Australia. The standard deviations are then 7.4 (1961), 4.8 (1980), 4.1 (1990) and 3.1 (2000). In

the statistical tests we control for the influence that this outlier might have without altering the findings. Figure 1 above

did not include the data on Australia.

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The expectation of the divergent partisan responses to de-industrialization is new to the welfare

state literature. The mainstream literature either equates partisan effects with left-wing governments

leading to more welfare across-the-board (Korpi and Palme 2003; Allan and Scruggs 2004), or

anticipates that institutional factors have overtaken as the main driver of provision (Pierson 1994;

Huber and Stephens 2001). In the relatively few studies in the comparative political economy

literature on education the overwhelming expectation is that left-wing governments will expand

spending compared to right-wing governments, i.e. the very opposite expectation we have (Boix

1998; Iversen and Stephens 2008; Busemeyer 2009). None of these studies do, however, to our

knowledge include measures of de-industrialization, or look at how political decisions regarding

education is related to other policy programs.

3. Methodology

In order to test the argument of the paper statistical evidence is presented on public spending

between 1980 and 2000 for 17 Western countries.5 We disaggregate the period into the 1980s and

1990s to see if as expected there are period effects. Spending is measured as a percentage of the

GDP as is customary in the comparative political economy literature. De-industrialization is

measured following Iversen and Cusack (2000) as 100 minus the sum of manufacturing and

agricultural employment as a percentage of the working-age population. Partisan government is

measured as the share of left parties in government and is taken from Huber et al. (2004), which is

one of the most well-established operationalisations in the literature. Given our argument, which

assumes that the government is led either by a left- or right-wing party the measure has the

5 Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New

Zealand, Norway, Sweden, the United Kingdom and the United States.

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advantage that any significant negative coefficients are testament to a positive association between

right-wing government and spending (the same logic as in Iversen 2005). To measure how de-

industrialization leads partisan governments to pursue different policies, we rely on the interaction

term between the partisan government and de-industrialization variables.

The interaction term between partisan government and de-industrialization measures

the partisan strategies directly. Yet, this does not tell us whether different governments are facing a

trade-off between the two policy solutions of transfers and education as de-industrialization rises.

We hypothesized that the partisan strategies would be accentuated when taking the trade-off into

account because left- and right-wing government not only is distinguished by the expansion of the

first choice policy, but also by the curtailing of the second choice policy. In the event that no or

only limited expansion is possible, it becomes particularly important to include a measure for the

trade-off because the increase in the first choice policy is then directly dependent on the decrease in

the second choice policy. To capture the trade-off, an interaction term between de-industrialization

and the two alternative policy solutions is included as well. That is, when estimating the

determinants of transfers the interaction between de-industrialization and education is included, and

when estimating the determinants of education the interaction between de-industrialization and

transfers is included. This is a simple, but in our opinion effective way of capturing the de-

industrialization-induced need for making trade-offs.

Apart from these variables, controls have been included to capture effects from the

constitutional structure and various socio-economic and demographic factors. We have deliberately

included several measures that capture fiscal austerity at the macro-level, notably net government

liabilities and net government interest payment. This may at first seem to rule out finding any effect

of the trade-off between the transfers and education because the need for a trade-off is ultimately

stemming from the fiscal austerity. Yet, if these austerity measures are not included it becomes

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difficult to know if the trade-off is really just a proxy for a general need to curtail spending in a

country, or if it relates to partisan strategies concerning rising deindustrialization more specifically.

Table A1 in the appendix lists all the variables with the operationalisations and sources.

All variables are measured as levels. This is the most appropriate choice in our

opinion because it is the absolute strength of left- and right-wing parties as well as the absolute risk

exposure that must be expected to matter. As noted by Huber and Stephens (2001) regarding

partisan governments, the impact of a 10% change in left-wing strength is highly dependent on

whether the absolute level is 5% rising to 15%, or if it is 45% rising to 55%. The same goes for the

impact of de-industrialization because we only expect de-industrialization to matter when the

absolute level becomes sufficiently high to affect the median voter. A 10% increase in de-

industrialization that does not affect the median voter is unlikely to make right-wing parties respond

by expanding education.

The regression models follow the convention of the literature by relying on Prais-

Winsten estimation with the panel-corrected standard errors and lagged dependent variables

suggested by Beck and Katz (1995). Recently some voices of critique have been raised against the

use of lagged dependent variables, which risk suppressing theoretically interesting variation in the

key variables (Achen 2000). We keep the lagged dependent variables in the model for three reasons.

First, because we expect the speed of adjustment to be slow, with the long term effect being bigger

than the immediate effect. According to Beck and Katz (2004) a lagged dependent variable is more

appropriate than an AR(1) specification in this situation. Second, because it is well-established that

social policy is prone to path dependency due to vested interests and learning effects, which may

guide how governments respond to new social risks like de-industrialization (Pierson 1994; 2000).

A lagged dependent variable is an appropriate technique to factor-out such influences stemming

from past policies, thereby isolating the effect of current-day strategic choices of the partisan

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governments (Keele and Kelly 2006). As pointed out by Beck and Katz (2004), it is, third and

finally, also the case that the ‘dominating effect’ of the lagged dependent variable is often

overemphasized, implying that the problems of including one is smaller than sometimes expected.

The regressions does not include unit dummies, or fixed effects, because ‘unit

dummies completely absorb differences in the level of independent variables across units’ (Plümper

et al. 2005, p. 331, emphasis in original). Thus, given that we are using levels of independent

variables we cannot simultaneously include unit dummies. As Plümper et al. (2005, p. 334) notes:

‘[I]f a theory predicts level effect on levels or on changes, a fixed effect specification is not the

model at hand. If a theory predicts level effects, one should not include unit dummies. In these

cases, allowing for a mild bias resulting from omitted variables is less harmful than running a fixed

effects specification.’ Following these considerations, the next section reports the findings of the

analysis.

4. Findings

Table 1 presents the results of the statistical tests. We are interested primarily in the three variables

in the top of the table. We start by looking at the determinants of transfers in the 1980s. Model I

shows the effect of partisan governments without taking the trade-off into account, while Model II

includes the trade-off. In Model I the partisan government variable is insignificant, but the trade-off

makes it highly significant and boosts the coefficients. Model III and IV show the same pattern for

the 1990s. In short, when including the trade-off variable left-wing governments are strongly

associated with more spending on transfers. Next, Model V and VI report the determinants of

educational spending in the 1980s and Model VII and VIII report the determinants for the 1990s. It

turns out that right-wing governments is significantly associated with more educational spending

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disregarding the inclusion of the trade-off variable, although the trade-off do accentuate the partisan

response as can be viewed from the bigger coefficients in Model VI and VIII compared to Model V

and VII, respectively.

TABLE 1 ABOUT HERE

Figure 4 shows the marginal effects of the main explanatory variable on transfers and education

using Model II, IV, VI and VIII, i.e., the full models with the trade-off variables included. A

number of things are noteworthy. First, the partisan strategies are accentuated as de-industrialization

rises. This follows from the argument above because the risk exposure to the median voter is fairly

slight at low levels of de-industrialization, but then increases together with de-industrialization.

Left-wing governments are responding to de-industrialization by expanding transfer programs even

at fairly low levels of de-industrialization, whereas right-wing governments in the 1980s only

expand education at higher levels of de-industrialization. At low levels of de-industrialization left-

wing governments are in fact spending more on education than right-wing governments (the two

graphs in the bottom row), which is in line with the argument of the paper because the need for

prioritizing between the two programs all else equal will be smaller. Another thing to note is that

the results are strongest for the 1980s (the two graphs on the left side) and weakest for the 1990s

(the two graphs on the right side) where the confidence interval is wider and include more of the

relevant observations. This, too, follows from the argument in the sense that we expected the slow-

down and convergence in levels of de-industrialization to reduce the explanatory power of the

partisan government variable.

FIGURE 4 ABOUT HERE

21

We have tested for the influence of outliers using the jackknife procedure. It turns out that the

results are not driven by outliers. The findings are, in sum, quite robust. They allow us to conclude

that de-industrialization leads left-wing governments to expand transfers and right-wing

governments to expand education. They show us that these diverse partisan strategies are

accentuated by the need for making trade-offs between the two types of programs, but that this

effect is particularly pronounced for left-wing governments. We argued above that this is because

left-wing governments on average preside over bigger initial budgets that allow for lesser additional

expansion. As expected we also found that the partisan strategies are most pronounced when de-

industrialization is biggest and that the argument in general faired best in the 1980s. We are,

consequently, able to verify all four hypotheses.

5. Ad fontes: Insurance, redistribution, and the partisan strategies of social protection

The causal argument of the paper is based on the gradual rise of de-industrialization. Yet, the

process of de-industrialization seems to be gradually grinding to a halt with most of the change in

1990s being caused by the catch-up of the laggards. In this narrow sense, the paper merely describes

a historical event, however important in its own right, and may not tell us much else beside that. But

the paper simultaneously contains some more general lessons that go beyond the idiosyncrasies of

the past decades and points towards more universal mechanisms that might be expected to continue

to operate and which therefore should inform future research. In this final section we will discuss

these lessons in relation to the existing literature.

The theory of de-industrialization taps into the varieties of capitalism approach that

has won great popularity the recent decade (Estevez-Abe et al. 2001; Iversen and Soskice 2001;

22

Martin and Swank 2004). The argument that preferences for insurance against skill redundancy

drive social policy provides an alternative to the power resource theory. This latter theory posits that

the primary motive of economic and political actors is redistribution, and that partisan differences

are likely to play an important role in terms of how much redistribution one will find in a country

(Stephens 1979; Korpi 1983; 2006; Bradley et al. 2003).

In this paper we took the lead from the theory of de-industrialization in assuming that

this process of labor market change constitutes a major motor that is likely to make the median

voter more favorable to spending. Critically, however, we simultaneously argued that how the

preference for more spending is met depends on the party in government. Left-wing governments

will systematically opt for those welfare programs that entail most redistribution, while right-wing

governments just as systematically will opt for those programs that redistribute as little as possible.

As such, the argument presented here promises to function as a stepping-stone for further

integration between the two sets of literature.

Iversen (2005) notes that countries with big welfare states generate high levels of

both insurance and redistribution, but as argued in the paper it is important not to presume a priori

that big spending equal extensive insurance equals extensive redistribution. In future work it will

therefore, above all, be important to consider more carefully the theoretical core of the two theories

and re-evaluate how that core relates to the function of individual programs in terms of insurance

and redistribution. Understanding this gap between insurance and redistribution is vital because it

captures why partisan governments can be expected to matter quite often; if insurance and

redistribution was the same thing, parties interested in capturing the median voter would have no

room working to the benefit of their core constituency. In that case we should only see partisan

differences when new social risks affect the work force with a lower risk exposure than the median

23

voter, but that would be a different type of effect with right-wing governments refraining from

government involvement all together (cf. Kwon and Pontusson 2008).

Distinguishing between programs that primarily provide insurance (education) and

those that both provide insurance and redistribution (transfers) will be a good starting point,

although arguably the transfer component can be disaggregated further. Adding to this, however,

are two complications. First, as noted by Pontusson (2005), even with a two-dimensional approach

it is probably not possible to account for all welfare programs. Especially programs like elderly care

and childcare appear historically to have been driven by a third logic, namely one of gender

equality, or defamilisation (Esping-Andersen 1999). Such non-economic preferences are alien to

both the varieties of capitalism and power resource theories, and it will be an important task to

gauge how they intersect with the preferences for insurance and economic redistribution not least as

dropping fertility rates and a soaring age burden calls for increasing female labor force

participation.

A second complication is constituted by the changing societal context, not least the

consequences of the maturation of the welfare states themselves. As argued by Pierson (2001), this

has had profound consequences for the options available to politicians and in this paper we showed

how it entailed a need for prioritizing between programs as across-the-board expansion no longer is

a viable solution. That is, even though expansion in the real world may be feasible sometimes, fiscal

austerity nevertheless generates a new policy logic to the extent that rising median voter risk

exposure cannot be matched by an expansion of the total budget. In our opinion the need to

prioritize in the context of rising median voter risk exposure is therefore likely to accentuate

partisan differences at the level of the individual programs, but wash them out at the level of total

spending. It is an expectation that gets prima facie validation from the fact that existing studies

finding no impact of partisan governments since 1980 have mostly been focused on more

24

aggregated spending categories (Huber and Stephens 2001; Swank 2001; Kwon and Pontusson

2008). Hopefully future studies will be able to look into the effects of partisan government over a

prolonged period of time at both aggregated and disaggregated levels, getting a better view at this.

Importantly, however, the partisan effects are not just direct, but also indirect because they have to

be seen in the context of the alternative programs that the partisan governments are actively

discounting. Needless to say, this makes getting the causal story of partisan effects right

considerably more difficult than has hitherto been appreciated in most of the literature.

25

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30

Figure 1. The development of de-industrialization in the Western world, 1960-2003

5060

7080

90

1960 1970 1980 1990 2000.

31

Figure 2.A model of partisan strategies under de-industrialization

Risk exposure

High income

Low income

Median voter

First choice

Second choice

a

d

b

c

Panel A Panel B

Median voter risk, t

Median voter risk, t-1

e

32

Figure 3. Cumulative left cabinet share and total social expenditure as a percentage of the GDP,

1980-2000

1520

2530

3540

0 10 20 30 40 50Cumulative share of cabinet seats held by the left

Table 2. Determinants of public spending

---Transfers ---

--- Education ---

Model I

(1980-1990) Model II

(1980-1990) Model III

(1991-2001) Model IV

(1991-2001) Model V

(1980-1990) Model VI

(1980-1990) Model VII

(1991-2001) Model VIII (1991-2001)

Partisan government* De-industrialization t-1

.0529 (.0323)

.0603 *** (.0158)

-.0091 (.0231)

.0725 *** (.0261)

-.0573 *** (.0141)

-.0730 *** (.0143)

-.0580 * (.0298)

-.0858 ** (.0518)

Education* De-industrialization t-1

-.0065 * (.0038)

-.0633 *** (.0139)

Transfers* De-industrialization t-1

-.0067 *** (.0014)

-.0109 *** (.0028)

Controls:

Lagged dependent variable

.9673 *** (.0127)

.9591 *** (.0088)

.9813 *** (.0117)

.9441 *** (.0144)

.7311 *** (.0443)

.7255 *** (.0565)

.2899 *** (.0542)

.2429 *** (.0665)

Constitutional structure

-.0566 *** (.0203)

-.0120 (.0168)

-.0149 (.0210)

.0497 ** (.0195)

-.0759 *** (.0231)

-.1155 *** (.0334)

-.0721 *** (.0157)

-.0829 *** (.0227)

Electoral system (PR)

-.3258 *** (.0986)

-.2509 *** (.0595)

-.0800 (.0818)

-.1361 (.0934)

.0153 (.0718)

.0640 (.1278)

.2843 ** (.1328)

.2139 (.1543)

Unemployment t-1

-.0093 (.0121)

-.0045 (.0078)

-.0037 (.0133)

.0292 *** (.0106)

.0058 (.0111)

.0093 (.0165)

.0597 *** (.0213)

.0584 *** (.0223)

GDP growth t-1

-.1093 *** (.0221)

-.0786 *** (.0132)

-.1740 *** (.0169)

-.1484 *** (.0156)

-.0631 *** (.0158)

-.0760 *** (.0211)

-.1035 (.0265)

-.0946 *** (.0131)

Female labor force participation t-1

-.0043 (.0038)

-.0113 *** (.0025)

-.0076 (.0052)

-.0081 * (.0047)

-.0013 (.0026)

-.0027 (.0036)

.0479 *** (.0130)

.0430 *** (.0131)

Output gab t-1

.0897 *** (.0096)

.0718 *** (.0095)

.0825 *** (.0185)

.1022 *** (.0183)

.0004 (.0120)

-.0033 (.0174)

.0202 (.0360)

.0115 (.0391)

Net government liabilities t-1

-.0024 (.0028)

-.0048 *** (.0011)

-.0076 *** (.0023)

-.0056 * (.0030)

.0010 (.0017)

.0024 (.0025)

-.0013 (.0047)

-.0026 (.0049)

Net government interest payment t-1

.0326 (.0539)

.0536 *** (.0117)

.0929 *** (.0249)

.0667 ** (.0284)

-.0733 ** (.0317)

-.1103 *** (.0385)

-.0013 (.0281)

.0066 (.0259)

Dependent population t-1

-.0050 (.0092)

.0002 (.0042)

.0530 *** (.0086)

.0185 * (.0111)

.0035 (.0037)

-.0077 (.0055)

.0320 *** (.0101)

.0344 ** (.0140)

34

Constituting variables of interaction terms:

Partisan government t-1

-3.442 (2.413)

-3.999 *** (1.174)

.4128 (1.794)

-5.806 *** (2.006)

4.444 *** (1.039)

5.621 *** (1.063)

4.800 ** (2.316)

7.070 ** (2.791)

De-industrialization t-1

-.0225 (.0213)

.0027 (.0281)

-.0382 *** (.0117)

.2145 *** (.0611)

.0533 *** (.0107)

.1313 *** (.0176)

.0505 *** (.0148)

.1861 *** (.0518)

Education t-1

.5576 * (.2876)

5.130 *** (1.108)

Transfers t-1

.4834 *** (.1055)

.8616 *** (.2112)

Constant

3.635 *** (.9020)

1.284 (1.845)

2.040 (.8965)

-2.249 *** (.6883)

-.0067 *** (.0014)

-5.143 * (2.557)

-15.29 *** (4.947)

R2

.99

.99 .98 .99 .89 .90 .72 .76

Countries 16

14 17 17 14 14 17 17

Note: Panel-corrected standard errors in brackets. ***= p-value ≤ .01; ** = p-value ≤ .05; * = p-value ≤ .10.

Figure 4.Marginal effect of partisan government on transfers (top row) and education (bottom row)

in the 1980s (left side) and the 1990s (right side)

Note: Graphs based on Model II, IV, VI and VIII of Table 1, respectively. 90% confidence intervals used.

-10

12

3

60 70 80 90 100

Deindustrialization

-10

12

3

60 70 80 90 100

Deindustrialization

-10

12

3

60 70 80 90 100

Deindustrialization

-10

12

3

60 70 80 90 100

Deindustrialization

36

APPENDIX

Table A.1. Variables used in the analysis

Variables Operationalization Source

Public spending

Public transfers and educational expenditure as a percentage of GDP

OECD (1992); OECD (various years): Education at a glance; OECD’s Economic outlook database *

Partisan government

Share of left parties in government Huber et al. (2004).

De-industrialization

100 minus the sum of manufacturing and agricultural employment as a percentage of the working-age population

Iversen and Cusack (2000); OECD (2008)

Electoral system Dummy: PR = 1; Majoritarian = 0

Constitutional structure

Additive index with federalism (none, weak, strong), presidentialism (absent, present), bicameralism (absent, weak, strong), and the use of popular referenda as a normal feature of the political process (absent, present).

Huber et al. (2004)

Unemployment

Standardized unemployment rate OECD (2008)

Real GDP growth

Real GDP growth OECD (2008)

Female labor force

Female labor force participation as percentage of the population 15-64 years.

OECD (various years): Labour Force Statistics *

Output gap Gap between real and potential economic output

OECD (2008)

Net government interest payment

Net government interest payment as a percentage of the GDP

OECD (2008)

Net government liabilities Net government liabilities as percentage of the GDP

OECD (2008)

Dependent population

Share of population aged 0-14 and 65+

OECD (2008)

* These variables have been collected and generously made available to the author by Marius R. Busemeyer.