Using a monthly data set for wages and employment of production workers in eighteen sectors for which continuous data are available back to January 1947, we compute new measures of earnings and wage inequality in U.S. manufacturing. We confirm that there is a close connection between the dispersion of hourly wage rates and unemployment. But we also show that, contrary to general belief and some of our own previous assumptions, in the 1950s manufacturing wage rate inequality rose sharply, reaching the extreme levels of the 1930s. An implication is that inequality in manufacturing hourly wage rates in the late 1970s and 1980s, previously thought to be lower than during the Great Depression, was in fact much higher. The new series also shows that wage rate inequality began declining again in 1994 and has now fallen to just below the peaks of the interwar period. The data are current to the end of 1998.

Introduction

The previous chapter showed how unemployment and inequality were closely related during the interwar and World War II years. Here we extend that analysis to the late 1990s. New, highly detailed data, as well as calculations by Garza-Cantú, permit us to offer continuous monthly series for inequality in U.S. manufacturing wage rates, beginning in January 1947 and up to date as of December 1998. This series tracks Galbraith's measures for the 1958–1992 period closely. It strongly supports the argument that there is a close association between the dispersion of hourly pay rates and unemployment – in effect, that wage rate inequality is a macroeconomic phenomenon.

Wage and earnings data by industrial sectors are readily available for many countries over long time frames. This chapter explores the application of the between-group component of the Theil index to data on wages, earnings, and employment by industrial classification in order to measure the evolution of wage or earnings inequality through time. We provide formal criteria under which such a between-group Theil statistic can reasonably be assumed to give results that also track the (unobserved) evolution of inequality within industries. While the evolution of inequality in manufacturing earnings cannot be taken as indicating per se the larger movements of inequality in household incomes, including those outside the manufacturing sector, we argue on theoretical grounds that the two will rarely move in opposite directions. We conclude with an empirical application to the case of Brazil.

Introduction

Most empirical work on inequality uses measures that are based on household surveys. These measures aim to provide a comprehensive overview of income inequalities, covering all social strata and comparable both through time and between countries. The Gini coefficient is the index most commonly computed from these sources, though various quintile ratios are also frequently deployed. But, as Galbraith and Lu have discussed (see Chapter 8), there are many gaps as well as other deficiencies in this data.

Fortunately, the decomposability properties of the Theil measure make it possible to repair this gap in part, albeit in most cases only for the limited span of the manufacturing economy.

Inequality has become perhaps the foremost preoccupation of modern empirical economics. Yet the conventional theoretical explanations of changing inequality rest on premises long ago demolished on logical grounds. This chapter summarizes a Keynesian theory of income distribution. The theory integrates macroeconomic and distributive phenomena and so accounts for the empirical relationship between the changing shape of the distribution and major macroeconomic events.

Introduction

Income inequality is surely “the prevailing social issue of our time.” But the development is recent. The rise in income inequality in postwar America dates only to 1970 and the reemergence of inequality as a social issue only to the late 1980s. It took the spur of Reaganism, with its celebration of conspicuous differentiation, to reawaken class consciousness in American political life. Before that time, attention had been on other issues for nearly sixty years.

The original submergence of class was a liberal achievement. It was perhaps John Maynard Keynes's greatest service to capitalism that he focused attention on jobs, that unemployment and not equality was the great issue of the Great Depression. In the Keynesian period – from 1945 to 1970 – income inequalities received scant scholarly attention. The great leveling achieved during World War II seemed to have become a fact of nature, and attention shifted to poverty as the organizing principle for social action. As early as 1957, John Kenneth Galbraith observed that “few things are more evident in modern social history than the decline of interest in inequality as an economic issue.”

This chapter presents a procedure for studying industrial performance and related issues, such as changes in the wage structure. This procedure combines cluster analysis and discriminant analysis as a package and applies this package to timeseries data. This enables us to organize industrial data into groups with similar wage or performance histories and then to extract summary time series showing the main pattern of variation in performance between groups.

Introduction

This chapter presents a procedure for studying industrial performance and related issues, such as change in the wage structure. The procedure combines cluster and discriminant analysis and applies them to time series data to explore, first, the group pattern and, second, the forces that promote the formation of that group pattern. This procedure can be applied to many fields for which time-series data are available on a single key measure of behavior for a large number of related entities – for example, wages by industry or occupation or expenditure by account in a study of government budgets.

The use of dated information as a tool for classification is well established in disciplines such as geology, paleontology, archeology, and even biology and developmental psychology. For example, Chiodi (1989) uses time-series height and arm span data to classify children, and Hirsch and DuBois (1991) classify children based on the similarities in behavior through time.

While much has been written on the successes and failures of industrial policies, systematic evaluation of their effects remains difficult. This chapter presents an approach based on a combination of cluster and discriminant analysis applied to time series of the rate of change of average wages by industry. We apply this approach to a Korean data set that may be one of the most comprehensive national archives of industrial and occupational wage data in the world. Our approach permits quantitative assessment of the legacy of Korean industrial policy and helps to show how Korean development has depended both on government and on the market.

Introduction

Governments and markets both exist. And while enthusiasts of markets have contested the role of government in development, and vice versa, it seems more realistic to accept that both play roles. The important questions are therefore:What roles? Through what channels? And to what extent? A sensible way to advance this discussion is to present an empirical indicator that can show the legacy of policies and other factors that have contributed to industrial and economic growth, and thereby approach the issue of the role of the government and the market. This chapter presents a combination of cluster and discriminant analysis applied to time series of average wage change by industrial category in order to assess the balance of government and market forces in Korea, with the Korean Heavy and Chemical Industrialization (HCI) as the prime example.

Simon Kuznets proposed a broad hypothesis on the process of development: that economic progress is accompanied by increasing inequality in the early stages of industrialization, which then tends to decline as industrialization deepens. Recent empirical tests of the Kuznets hypothesis have raised questions about this conjecture, yet most of these studies are based on limited and deficient data. Here we examine the dynamics of inequality across the Organization for Economic Cooperation and Development (OECD) using methods that allow the construction of long and dense time series of inequality. We find that an augmented Kuznets curve for developed countries, where inequality increases with income growth for the highest-income countries, is consistent with this data set. Thus, we offer a macroeconomic alternative to the skill-biased technological change hypothesis, which has been dominant in the literature as an explanation for increasing inequality.

There is a common view that unemployment in Europe is attributable to rigid wage structures, high minimum wages, and generous social welfare systems. In fact, countries that possess the low inequality such systems produce tend to experience less unemployment than those that do not. We show that inequality and unemployment are related positively across the European continent, within countries, between countries, and through time. Large intercountry inequalities across Europe also appear to aggravate the continental unemployment problem, and we find evidence that when these inequalities are taken into account, overall earnings inequality is higher in Europe than in the United States. We therefore suggest that the key to reducing unemployment in Europe lies in measures that reduce, not increase, inequalities in the structure of pay – and that do so at the continental level. This is a long-standing and often overlooked characteristic of social welfare policy in the United States.

Introduction

What is the relationship between inequality and unemployment? This question is perhaps the most important issue in the political economy of Europe, and it has relevance for other regions with developing transnational ties, including the United States and the North American region.

One widely held view is that high unemployment rates in Europe are due to that continent's generous social welfare systems and “rigid” wage structures, or, in other words, to the equality that is the characteristic goal of social democracy.

Introduction

The analytical core of constitutional political economy is located in the categorical distinction between two sets: (1) alternative constraints or rules and (2) alternative positions or outcomes attainable within separately defined constraints. Almost all discussion has proceeded on the presumption that there exists some “natural,” or empirically derived, basis for this distinction. The familiar explanatory reference is to ordinary games (poker, tennis, basketball), where there is surely universal recognition of the distinction between “the rules,” which indeed define the game itself and which must be explicitly chosen through some process, and the outcomes or solutions that emerge from the interdependent choices among strategies made by the players whose behavior is constrained by the rules that are chosen.

The extension to politics is not so simple as it may appear to be, even to those who share the American sense of constitutional order, with its categorical difference between constitutional law and ordinary legislation. Here the distinction between the choice among constraints and choices made within constraints becomes evident, but the analogy from ordinary games breaks down because outcomes within rules are explicitly chosen; political outcomes do not emerge from the interdependent choices made by separate participants as is the case in ordinary games. Nonetheless, the distinction remains central to the analytical exercise. And, in an even broader perspective, political philosophers who seek to ground political legitimacy in consent or agreement must necessarily place the formation of the basic social contract at a level or stage of choice that is categorically separate from the give and take of ordinary politics.

Beyond Traditional Federalism

The economic theory of federalism yields one clear and overriding result: a federal (i.e., decentralized) state is superior to a centralized one in the sense that it fulfills the demands of the citizens more effectively. A federal constitution that endows the federal units (provinces, Länder, states, cantons, or communes) with sufficient decision-making rights and taxing power has three major advantages over a unitary state:

Advantage 1: More Flexible Politics. In all societies, citizens differ widely in their demand for services provided by the state. These differences in demand are not only the result of heterogeneous tastes due to differences in tradition, culture, language, and so on, but also of unequal economic conditions. The latter are caused by, for example, leads or lags in the general business cycle and, of course, special structural conditions such as differences in infrastructure, unemployment, the concentration of particular industries etc. These differences in the demand for public services must be met by differentiated supply policies if citizens' preferences are to be fulfilled. Federal sub-units are best able to meet this challenge. The politicians in charge are better endowed with information about the local requirements. They have the incentives to provide these services according to the preferences of the citizens because they are directly accountable for the local policy and their reelection depends on the satisfaction of the voters they represent.

The conference on Constitutional Political Economy convened in Messina and Taormina in October 1997 was a singular academicintellectual event. The conference sponsors did an outstanding job in attracting serious research scholars from many countries, all of whom had demonstrated an understanding and appreciation of the importance and relevance of constitutional issues in the world at the end of the century, in both international and national political settings.

In my own introductory remarks at the conference's opening session in Messina, I emphasized the potential significance of the European and Italian venue for such a conference. Europe, at century's end, almost above all else, needs to pay explicit heed to its emerging political structure, which has, to this point, been allowed to evolve through the origin and development of its separate institutional agencies, without constitutional coherence, even as imposed or modeled by those whose task is to bring intellectual-philosophical order into complex organizational reality.

The elementary first step toward constitutional understanding, namely the recognition of the necessary distinction between the choiceoperation of the rules or constraints and the choice-operation of ordinary politics within the constraints, has never been characteristic of European attitudes, even those emerging from the academies. The integration of the historic nation-states of Europe requires attention to basic constitutional issues. European research scholars must, by necessity, become constitutionally informed.

Introduction

Economic systems exist in an environment, and they must, in one way or another, adapt to the conditions and changes in their environment. Their ability to function and survive depends on their adaptive capacity. This problem has existed throughout the ages for all economic systems. It has, however, without a doubt become especially topical in recent times through the accelerated economic integration worldwide and the increasing globalization of markets. Discussions, under headings such as “institutional sclerosis,” of the present difficulties that European welfare states encounter in a world of increasing global competition illustrate this fact.

The ability of economic systems to adapt to changes in their environment, and the manner in which such adaptation proceeds, critically depend on their economic constitution, that is, on the framework of rules and institutions that constrain actions and transactions of economic agents within a jurisdiction as well as their transactions with actors outside. External influences always affect an economic system through their impact on the behavior of persons within the respective jurisdiction. And what we describe as a system's adaptation to its environment is, in the final instance, always a matter of reactions of individual persons to changes in the environment – whether these reactions occur through separate individual responses or through organized collective choices, and whether they occur as adaptive responses on the sub-constitutional level or as changes in the economic constitution itself. Decisive for the adaptive capacity of an economic system are the ways in which its economic constitution channels the efforts of individual actors in their private as well as in their public political capacities.

Introduction

Why do some societies prosper and grow? Why do other societies stagnate, though they have equal or superior endowments of natural and human resources? It is not surprising that social scientists do not fully agree on precisely which economic variables are most important. What is interesting is the growing consensus that, even if we could identify all the economic variables, they would still be insufficient to explain growth and development. If this is true, what are the omitted factors?

An analytical theory of “culture” is a crucial part of the answer. “Analysis” of culture may seem like an oxymoron, of course. Cultural explanations have been marginalized in the theoretical literature, and for good reason. Those who study economic development, or comparative politics, are skeptical of giving a residual a name and then calling it a variable. Persson and Tabellini had it right: Explanations for growth cannot be random effects, admitting of no further analysis.

Constitutional political economy is an intellectual endeavor in which the notions of efficiency and justice are necessarily balanced. Justice should emerge naturally from a constitutional process, whereas efficiency must be achieved through conscious effort. All the key issues in constitutional political economy relate directly or indirectly to one of these two notions and most to the interplay between the two. Fundamentally, we are concerned with the development of formal “rules” within informal structures in order to regulate all human actions.

Considerations of efficiency are in the realm of positive economics, that is, the analysis of questions of “what is.” Notions of justice, however, fall within the purview of normative economics, that is, the examination of questions of “what should be.” Constitutional political economy concerns the legal foundations of the market. The legal infrastructure is operationalized through a set of rules and regulations that can be thought of as signals indicating the domains of choice. It follows that these rules influence outcomes – a concern of positive economics. Further, some outcomes are “better” than others, which introduces issues related to comparisons of different sets of rules – a normative consideration.

Public choice is concerned with the development of a rigorous axiomatic general theory of government. In this view, politics is understood as a marketplace for individual exchanges. Within this marketplace, rules and regulations function as constraints on individual and collective action. These rules are implemented according to the institutional framework of the nation-state.

Electoral system choice, especially the distinction between proportional representation and the plurality forms of electoral rules, is widely regarded by political scientists as one of the fundamental institutional decisions made by a democratic polity. Part II is made up of contributions that examine the operation of the systems and institutions of representation. Grofman and Reynolds provide an overview of the current state of knowledge and of the cutting-edge areas of research. This includes a panoramic view of such issues as votes–seats relationships, party proliferation and government stability, as well as the nature of partisan bias, incentives for strategic misrepresentation of preferences, incentives for voter turnout, and incentives for localism and corruption.

Mudambi and his colleagues take a practical look at the effects of electoral rules on coalition strategies in the context of Italian national elections. The rules in question are an attempt to move away from a proportional system toward one incorporating elements of plurality. Since elements of both systems are present, their effects on political coalition strategies can be studied. Paul and Wilhite, on the other hand, examine the plurality system in U.S. congressional elections, focusing on effects of campaign finance considerations.

Many important characteristics of government are not included in formal constitutions. These include the organization of public administration and its relationship with the polity and, in many federal systems, with the local and regional government. It is generally argued that voters are neither interested in nor capable of exerting influence on these aspects of government.

The Constitutional Premise

A constitution is here defined as a set of rules that determine the political institutions of a society (Mueller, 1996:43). Since a society is defined in terms of the existence of such a set of rules, every society, whether democratic, oligarchic or autocratic, has a constitution.

All societies emerge from some pre-society form that is here called a state of nature, which itself influences the nature and behavior of individuals. In this sense, all constitutions evolve over time and are not to be conceived as rational constructs, even though most scholars of constitutional political economy (Buchanan and Tullock, 1962; Rawls, 1971; Buchanan, 1975; Mueller, 1996) analyze constitutions from a constructivist rationalist perspective, ignoring the evolutionary process.

The importance of evolution is most clearly evident in the example of the United Kingdom, whose unwritten constitution has evolved over more than two millennia. This constitution has been and is being forged by successful and unsuccessful invasions from outside, by bloody civil wars and by the building and then the dismantlement of a great Empire, as well as by a slow, essentially non-violent, post-1688 shift from autocratic monarchy to constitutional monarchy.

The importance of constructivist rationalism is most clearly evident in the case of the United States, whose written constitution, which embraced much of the antecedent English common law, was chosen consciously by a property-owning white male minority elite, was written by design and with purpose and was then imposed upon a largely unen- franchisee! population.