Governance Matters?: Social Concertation and Macro-Economic Outcomes

The contemporary labor market and welfare state has undergone dramatic changes since the 1980s. In most countries, governments have been facing the declining economic growth, higher level of unemployment, rising inequality, and tighter fiscal constraints. Just as the context of labor market and welfare state has been changed, the patterns of governance coping with the problems have also changed significantly.

Previous literature shows that the macro-economic outcomes such as unemployment and inequality have something to do with the different patterns of governance. This study seeks to examine the relationship between governance patterns and macro-economic outcomes by analyzing the 30 year trajectories of labor market and welfare reforms and policy-making systems in 20 advanced countries. We do so by proceeding as follows.

First, using the optimal matching technique, we identify different trajectories of labor market and welfare reforms and policy-making systems in the three decades from 1980 to 2009. Second, we group the countries based on the similarities in reform trajectories and policy-making system changes. Third, we compare the levels of unemployment rate and inequality across the groups.

The results show that countries characterized as coordinate market economy have developed new social welfare and active labor market programs relatively early and have relied on more consensus-based policy-making systems, which require the cooperation between government and organized interests for coordinating macro-economic objectives. The results also reveal that those countries following higher expenditure on new social risks and concertative policy-making trajectory perform better in terms of reducing unemployment and inequality.  We discuss the implications of these findings for the development of new governance model in Korea.