The Size of the Welfare State: Lobbying and Majority Voting∗

This paper analyzes the determinants of the welfare state. In a model that integrates majority voting and lobbying by interest groups, we show how the bargaining power of the unskilled and the skilled workers’ lobby affects the size of the welfare state: The more influential the union representing the unskilled, the greater the extent of redistribution. On the other hand, the presence of dependents reduces redistribution due to the leakage of welfare benefits. Our empirical investigation offers support for our model: In the baseline specification, an 10% increase in the dependency ratio leads to a decrease in the labor tax rate of 6 to 8 percentage points. Similarly a 10 per cent increase in union density and union concentration leads to an increase of 1% to 2% in the labor tax rate. JEL Classification: ∗We are grateful to Peri Silva for excellent research assistance. All remaining errors are ours.