Parties, Unions, and Central Banks: An interactive model of unemployment in industrial democracies

Many studies suggest that either partisan governments, labor market centralization, or central bank independence affect unemployment, but none consider the full range of interactions among these institutions. I offer a fully interactive model of unemployment and test it using quarterly data from fifteen industrialized democracies over 24 years. Confiming earlier work, I find central bank independence (CBI) and wage bargaining centralization interactively determine unemployment, with CBI having the greatest benefit in moderately centralized labor markets. Adding partisan governments to this strategic interaction, I find that unemployment is subject to permanent, labor-market-contingent partisan cycles in which the left always lowers unemployment. Both theory and evidence show larger cycles in moderately centralized economies with hawkish monetary authorities, suggesting left-wing government and monetary non-accommodation are complementary in this case. One size does not fit all, though: I find no benefit from CBI in centralized economies, and a substantial unemployment cost in decentralized labor markets. ∗Ph.D. Candidate, Department of Goverment. (Littauer Center, North Yard, Harvard University, Cambridge MA 02138; http://chris.adolph.name, [email protected]).