Institutions and Inequality in Liberalizing Markets: Explaining Different Trajectories of Institutional Change in Social Europe

The collective bargaining systems of European coordinated economies were traditionally dominated by strong manufacturing unions that were able to distribute productivity gains to their members in core sectors, and throughout the whole economy. As employment shifts to service industries characterized by low union density and volatile jobs, unions find it increasingly difficult to maintain encompassing bargaining arrangements. These developments are often connected to broader processes of economic globalization and European integration that are driving the liberalization of protective institutions and increasing inequality.

A large body of comparative research seeks to analyze the political dynamics through which coordinating institutions are undermined or sustained across European political economies. Scholars have argued that cross-national variation is due to variation in the role and size of the state, the degree of centralization in business associations, and the structure of the electoral and political party system. These analyses concentrate overwhelmingly on the politics of coalition-building at the national level, with most studies focusing on organized labor and employer interests in core manufacturing sectors. Where service industry actors are included in these frameworks, they are typically either treated as peripheral outsider groups or analyzed for their interactions with representatives of manufacturing employers or unions in peak associations.

We argue for an alternative industry-based approach to explain divergent patterns of institutional change and their labor market effects. Institutional change has been argued to occur through processes of “drift” or “conversion” through the actions of actors re-interpreting institutions. Much of this reinterpretation occurs within specific industry and workplace setting, where collective bargaining takes place and where solidarity is created or dualism intensified. By neglecting heterogeneous sectoral developments, theorists may overestimate institutional stability as well as the distributional effects of formal policy changes. Understanding the political dynamics of institutional change at the micro- or meso- levels within national political economies is necessary for developing broader theories concerning sources of institutional change from below: evaluating weaknesses or pressure points in national models, and identifying the power resources that key actors draw on at these levels to pursue their distinctive interests.

We demonstrate the value of this approach through a comparison of divergent trajectories of institutional change in national telecommunications industries, based on case studies in Austria, Denmark, Germany and Sweden. Our analysis traces developments in sectoral and firm-level bargaining following market liberalization and privatization of incumbent firms in the 1990s. It is based on company publications as well as 62 interviews conducted in the four countries between 2010 and 2014. Despite broad similarities in the challenges to established institutions, we observe different outcomes in the four countries. In Austria and Sweden, unions maintained and extended encompassing collective bargaining institutions within the major incumbent firm, at the industry level, and across externalized jobs in subcontractors and temporary agencies. In contrast, Denmark and Germany experienced disorganization at all levels, resulting in growing inequality between industry segments and within incumbent firms. These trends were exacerbated by restructuring strategies that reduced pay and conditions for formerly core workers.

This pattern of outcomes is surprising from the perspective of recent comparative research on political responses to liberalization, which would predict greater maintenance of solidaristic institutions and less dualism in the macrocorporatist Scandinavian countries compared to the enterprise- or industry- corporatist Central European countries. This can be explained by comparing how historic differences in sectoral collective bargaining institutions affected the changing power resources of labor and management. First, different configurations of institutional loopholes affected employers’ ability to differentiate pay and conditions through organizational restructuring or externalization of work. Second, past union structures in lead firms and at sector level influenced the degree of inter-union cooperation that developed within emerging sectors and across networked workplaces. These factors were interrelated through positive or negative feedback loops. The presence of institutional loopholes further undermined the potential for labor cooperation, exacerbating inter-union conflict; while bargaining structures that promoted labor cooperation played a role in preventing the expansion of loopholes.

Our findings contribute to broader debates on the relationship between institutions, actor strategies, and changing patterns of labor market inequality. First, we demonstrate that the distinctive characteristics of industrial relations within a major service industry can lead to outcomes that are poorly predicted by the comparative literature focusing on national labor market policy or coalition structures. Past research in industrial relations has sought to draw attention to distinctive sub-national processes of institutional change, including several studies focusing on the telecommunications industry. However, findings from these studies are either broadly consistent with outcomes predicted by the literature on national models; or reflect heterogeneous combinations of causal variables that are difficult to generalize more broadly. The context-specific character of these research findings may be one reason why these scholars’ critique of the macro-level focus of most comparative political economy scholarship has largely been ignored within this literature. Our research design, based on two sets of matched pair case studies in a rapidly liberalizing service industry, allows us to explain surprising patterns of institutional change at sector level given a range of similar contextual factors.

Second, we map out the mechanisms at sector level that can contribute to these different sub-national trajectories of institutional change. Findings demonstrate that prior institutions had significant effects on both the restructuring strategies of employers, as they sought to reduce costs, and the evolving political capacities of labor unions, as they sought to maintain or extend their influence over these strategies. Past studies have argued that institutional loopholes or “exit options” influence employers’ ability to differentiate pay and conditions across networked workplaces. We show that employer strategies to exploit these loopholes not only affect patterns of inequality in the short term, but also have persistent effects on the capacity of different workers’ groups to cooperate– and thus to develop coordinated strategies to close these loopholes. Thus, the political capacities of employers to pursue bargaining decentralization or institutional avoidance and of unions to contest these strategies are closely linked and mutually reinforcing. This suggests that it is necessary to analyze both together to explain different trajectories of institutional change.