Theories of Institutional Change and Labour Market Reforms in Spain and Italy

In this paper, we will consider the extent to which labour market and welfare reforms in Spain and Italy have followed the patterns predicted by political economists studying institutional change. One of these predicted patterns is evolutionary. In these cases, slow shifts in underlying interests give rise to new coalitions favoring significant reforms, the adaptation of existing institutions to new functions or their simple abandonment. An alternative path to change emerges when exogenous shocks force a rapid—and often radical—revision of prior institutional settlements. The Euro crisis would seem to be a classic case of the latter. If this exogenous shock sufficiently weakens the domestic coalition that has long supported dualization, then we would expect labor market reforms to move Southern Europe in a decisively deregulationist direction. Alternatively, if, despite the stresses posed by the demands of powerful external actors, the long-standing domestic, cross-class coalition defending insider labor market privileges holds together, dualization would be expected to increase. Our analysis will show that neither of these hypotheses is adequate to the task of understanding the direction of labor market reform in Southern Europe since the onset of the crisis. We suggest that the aggressive employer offensive in Spain was made possible by the close political connections between the employers’ associations (notably CEOE) and the PP, which facilitated a partisan strategy of deregulation that served both political and economic ends. In Italy employers have a much more varied set of economic interests and political connections which undermined joint action to push the deregulation agenda. These political relationships, much more than the different nature of labour representation or formal political institutions, account for the different outcomes in the two cases. We conclude that studies of institutional change need to move beyond narrow adscription of insider and outsider status to employee interests, and take more seriously the competitive strategies of employers, and the relations between employers’ interests and political parties.