LO and Behold: Nordic Wage-Setting Institutions and Structural Transformation

The literature on macroeconomic performance has accorded a prime role for institutions over much of the last three decades. The focus in the mainstream has either been to analyse 'fundamental' determinants of development; deep-lying institutions, proxied in some instances by settler mortality in ultra long run economic development (Acemoglu et al, 2001) or the role of labour institutions in shorter-run levels of output and employment in advanced economies (Nickell & Layard, 1999.) This paper adopts a hybrid approach, analysing the role of labour institutions in longer run economic development (proxied by sectoral structure) -- an area that has surprisingly been relatively neglected in recent decades. The motivation is partly driven by growing recognition that reconciling equitable distribution with robust macroeconomic performance is an important priority for practitioners of development policy. The paper is also motivated by the proposition that 'corporatist' wage-setting institutions most strongly associated with the Nordic Social Democracies for a period until the 1980s can be a tool for promoting structural transformation and economic development. The paper sets forward two theoretical frameworks and two pieces of empirical evidence to advance the proposition. In the theoretical contribution, a simulation of a shock to wage inequality within a 'Lewisian' framework and an extension of the Calmfors-Driffill framework to a developing country context. In the empirical contribution, a cross country aggregative analysis of OECD countries and a firm level analysis of manufacturing in 5 African economies. The findings suggest bargaining centralisation can promote the development of manufacturing in both advanced and developing countries.