The social democratic vision of society envisaged a world in which human beings control their circumstances rather than being controlled by them. One essential characteristic of such a society would be that it guaranteed its members a decent livelihood. Rather than large sections of the population being condemned to inactivity by recurring economic crisis, all those able to take up employment should have the possibility of doing so. Those who temporarily or permanently lack the ability to provide for themselves should be able to count on the solidarity of society to provide them with the means for a decent livelihood. The inability to work should not be a condemnation to live a marginalized existence. Sickness should not be an economic catastrophe and the health care received should be determined by need rather than by ability to pay. Likewise, education should be provided according to ability rather than according to social status or wealth. In addition, such a society should be democratic. A society that achieved freedom from economic want by subjecting its members to the whims of an overpowering state would defeat its own purpose. In short, the social democratic program aimed to reform the market economy so as to combine political and economic liberty.

During the first couple of decades after its birth in the second half of the nineteenth century, the social democratic struggle focused primarily on achieving political liberties.

As noted in the introduction to this volume, common trends among OECD countries do not necessarily entail convergence. Thus the absence of convergence should not lead us to conclude that there are no common trends. Patterns of wage inequality illustrate this point. In virtually all OECD countries, wage differentials became more compressed in the 1970s, and this trend abated in the 1980s. In many countries, wage inequality has increased over the past 10 to 15 years. Yet the extent of wage compression in 1970—85 varies greatly across countries, and so does the extent of wage dispersion since 1980. Though some changes in relative country rankings occurred, cross-national variations in levels of wage inequality were as great at the end as they were at the beginning of each phase.

Several of the preceding chapters in this volume suggest that wage distribution represents a crucial dimension of the ongoing reconfiguration of wage bargaining, macroeconomic management, and public provision of social welfare in OECD countries. This is perhaps especially true for the Nordic countries, where wage restraint was explicitly linked to wage solidarity in the 1960s and 1970s, but trends in wage distribution appear to be closely related to institutional change in other countries as well. Before we can begin to grapple with contemporary dynamics, however, we need a better understanding of the determinants of cross-national variations in wage distribution or, in other words, a better understanding of how different varieties of capitalism produce distinctive wage-distributive outcomes. While the politics of wage distribution have figured prominently in the literature on the Swedish model, they have been largely neglected by more broad-gauged approaches to comparative political economy.

Labor economists who study wage distribution from a comparative perspective typically end up arguing that institutions matter, that is, that supply and demand factors alone cannot explain observed variations in wage inequality across countries (see Rowthorn 1992; Freeman and Katz 1995; Blau and Kahn 1996; Gottschalk and Smeeding 1997). From a political-economic perspective, this literature is problematic in that it deals with the question of institutional context in either a reductionist or a residualist manner. To the extent that economists incorporate institutional effects into their models, they tend to reduce institutional context to a single, one-dimensional variable, such as the centralization of wage bargaining.

In essence, the viability of the growth regime of the post-1945 era depended on the ability to contain inflation without recourse to sharply restrictive macroeconomic policies. In practice, this meant increasing reliance on income policies, since the price and quantity controls of the immediate postwar period could not be continued indefinitely. Yet, relying on income policies is always a precarious strategy. Ultimately trade unions are organizations designed to benefit their members in wage bargaining and not to function as an additional instrument in macroeconomic policies. During the sixties the strategy of relying on microeconomic policies to contain inflation increasingly came into conflict with the organizational logic of the trade unions, especially so because many countries experienced a further reduction in unemployment rates during that decade. The wave of labor unrest that spread across Western Europe in the late sixties therefore was not the prelude to a further strengthening of the left but rather the first announcement of the end of social democracy's ideological hegemony. The disintegration of income policies as an instrument for containing nominal wages spelled the danger of an inflationary spiral. As in the early twenties, the only feasible policy in such a constellation, for social democratic and non–social democratic governments, would be to reintroduce unemployment in order to contain inflation.

The Nordic countries have commonly been considered models of highly centralized systems of wage bargaining. In the American literature, they are known as exemplars of corporatism, the polar opposite of such decentralized systems of wage setting as the United States. Yet, as the editors to this volume suggest in their introductory essay, a decentralization of wage setting is generally believed to characterize the corporatist countries of Northern Europe in the 1980s and 1990s. In this chapter, we investigate whether such a decentralization has been underway in Denmark, Finland, Norway, and Sweden.

Why should the level of wage setting matter? One reason is that it is believed to affect economic efficiency and macroeconomic performance. This has been a controversial issue, one that has generated wildly divergent views on the merits (or conversely the deficiencies) of bargaining centralization. On one side are those who believe that centralized negotiations improve economic performance by allowing wage setters to incorporate various externalities into their decisions that would otherwise be ignored by actors who have only local responsibilities. On the other side are those who believe that any centralized system of wage determination is likely to suffer many of the same informational and incentive failures as central planning.

Recently, however, many scholars have assumed a more qualified and historically contingent stance, proposing that centralized bargaining, while not in principle inefficient, has become less efficient or less feasible over time. According to this line of argument, centralized wage-setting institutions worked well during Europe's “golden age,” or the first three decades after the Second World War. However, in the years since the first oil shock of 1973-74, so the argument goes, European economies have changed in ways that have reduced the efficiency of centralized wage determination. As a result, it is argued, wage setting, where it was not already decentralized, is undergoing a general tendency toward decentralization.

The alleged causes of such changes are said to be multiple. They include changes in production techniques, changes in occupational structures, and the increased integration of world markets. Domestic and international factors are both believed to be at work in shifting the preferences of employers away from centralized bargaining arrangements.

This volume has its origins in a workshop on the “Swedish model” organized by David Soskice at the Wissenschaftszentrum, Berlin, in 1992. From the beginning, our concerns were analytical and comparative rather than descriptive and narrative and, over time, the collective deliberations that went into this volume became less “Swedocentric.” As it now stands, the volume includes quantitative analyses that encompass the entire range of OECD countries as well as single-case studies of the evolution of Swedish wage bargaining and macroeconomic policy and qualitative analyses that compare the Swedish experience to that of other Northern European cases. Motivated in large measure by David Soskice's distinction between “coordinated” and “liberal” market economies, the contributors focus on differences among and the dynamics of change within coordinated market economies. The Swedish case still figures prominently in most of the chapters that follow — it is seen by most as a central puzzle in the political economy of advanced democracies — but all the contributors are broadly concerned with the political economy of organized capitalism, including the causes of institutional change in wage bargaining, the rise of monetarist macroeconomic policies, and the politics of wage and income equality.

A distinction that is quite central to this volume is that between centralized and decentralized coordination, the former epitomized by Sweden and the latter by Germany. Applied to the collective endeavor of this project, this is clearly a case of decentralized coordination. Although all contributors broadly agree what the important research questions are, and although we share a common conceptual framework, there is too much disagreement about the facts and too many conflicts in our understanding of theoretical mechanisms to warrant a single overarching theoretical model. Nevertheless, the chapters in this volume are the result of a continuous collective enterprise in which ideas and data have been freely shared, and in which theoretical puzzles and answers have been bounced back and forth between different authors. We all reject the notion that changes in institutions and economic policies over the past two decades can be adequately understood within either a neo-corporatist or a new classical framework, and we all accept the idea that the patterns of change and stability are the result of distinct sets of interactions between economic institutions and actors, including employers, unions, state bureaucracies, and governments.

Recent developments have brought the question of institutional change to the fore front of the research agenda of comparative political economists. In Western Europe, as elsewhere, dramatic changes in domestic politics have accompanied equally dramatic shifts in internationally determined parameters of economic performance and policy-making. It has become commonplace for students of West European political economy to speak of the decline of corporatism, that is, the decline of institutional arrangements for collaborative or “tripartite” governance of labor markets by representatives of capital, labor, and the state. Along with the profound transformations underway in the national and international governance of capital, product, and service markets, this development would appear to mark a major turning point.

This chapter treats the decentralization of wage bargaining in Sweden as a case study of institutional change. In the comparative political economy literature, Sweden has stood out as a paragon of institutionalized class compromise, and the system of centralized, economy-wide wage bargaining was, quite rightly, identified as the keystone of the Swedish system of corporatist market governance. However, this characterization of the Swedish case is no longer valid.

As we shall document, Sweden's powerful engineering employers began to push for decentralization of wage setting in the early 1980s and achieved what they wanted, in a fitful and conflictual process, by the early 1990s. At their insistence, the Swedish Employers’ Confederation (Svenska Arbetsgivareforeningen; henceforth SAF) simply closed down its own bargaining and statistics departments in the Spring of 1990. Because wage bargaining has been so important in the postwar Swedish political economy, its decentralization has altered the overall configuration of political-economic institutions (cf. Iversen this volume). Decentralization has undermined the authority and political influence of the peak organizations of labor and capital, in turn changing the politics of economic policy-making and of electoral mobilization. The campaign to decentralize wage bargaining in fact forms part of a broader business challenge to Sweden's “negotiated economy,” where all important markets are interactively regulated in a centralized, institutionalized process of bargaining among private organizations and state agencies. Advocating structural reforms - privatization, deregulation, and EC membership - leading Swedish businessmen have thus renounced their old role in co-managing the Social Democratic welfare state in the 1980s. In a dramatic act of rebellion against corporatism, for example, SAF withdrew its representatives from the boards of state agencies in 1991 (see Ahrne and Clement 1994; Pestoff 1995).

A central tenet of the corporatism literature is that the Phillips curve trade-off between inflation and unemployment is mitigated in countries with powerful and centrally coordinated organized labor movements. Most empirical studies, however, are based on data about labor market institutions from the early 1970s and refer to macroeconomic outcomes in the decade following the first OPEC oil shock in 1973. Recent case studies, in contrast, suggest that corporatism broke down during the 1980s in its Scandinavian bastions, in a cycle of strikes, inflation, and ultimately higher unemployment (Iversen 1996; Pontusson and Swenson 1996). We argue that one important reason for the apparent economic problems of strong labor regimes in recent years has been the growth of publicsector unions. So long as public-sector unions are not “too strong” (this limit is estimated empirically), corporatist institutions continue to promote both price stability and low rates of unemployment.

Encompassing labor movements - those that cover large sections of the work force in a relatively small number of independent unions and in which authority is concentrated in the hands of leaders of a single trade union confederation — provide an organizational structure that is conducive to low inflation and low unemployment because they mitigate distributional conflict among all workers. There is a limit, however, to the ability of encompassing labor movements to perform this role. Where public-sector unions are extremely strong (as has recently been the case in Scandinavia), confederation leaders cannot stop public-sector workers from using their organizational power to bid up their wages to levels that have deleterious consequences for the private sector - and especially for those industries that are exposed to international trade.

This chapter relies on three recent systematic studies of labor movements in Organization for Economic Development and Cooperation (OECD) countries that allow us to test the labor market institutions-performance nexus more precisely than has hitherto been the case. We use Visser's (1991) data on publicsector unions, Golden and Wallerstein's (1995) analysis of the structural attributes of organized labor movements, and Traxler's (1994) study of the coverage of collectively bargained wage contracts. These data sources allow us to construct time-sensitive measures of theoretically important attributes of organized labor movements.

In recent decades, social democracy has repeatedly been declared dead. In response to the collapse of the growth regime in the seventies, many analysts concluded that the social democratic model had become either economically or electorally unfeasible. According to liberal supply-side economists, the ever-increasing regulation of the economy was strangling entrepreneurial activity. In order for prosperity to be regained, a decisive turn to liberal economic policies was required.

Sociologists and political scientists with more sympathies for the social democratic project instead predicted the inevitable decline of social democracy due to the erosion of its electoral base. Because social democracy appealed to the common interests of the traditional working class, it seemed that it could only thrive politically in a society in which blue-collar workers not only formed the majority but also identified themselves as belonging to one class.

Since the sixties, these alleged preconditions for social democratic success seemed to be waning rapidly. Industrial jobs started disappearing so rapidly that by the midnineties, at best only 20 percent to 30 percent of employment relations could be characterized as blue collar. Moreover, the blue-collar class itself seemed to increasingly abandon its traditional social democratic values. To the extent that the expanding welfare states of Western Europe remedied the disadvantaged position of labor, the conditions of work became less important as a focal point for identity formation.