Just three years after publishing The Politics of Social Risk: Business and Welfare State Development, a prize-winning book on the role of employers in the development of European welfare states, Isabela Mares offers an overarching explanation of labor market performance in postwar Europe. She builds on the institutionalist literature in political economy, but combines its best-known models of labor markets with other elements. As foundations, she takes the Calmfors-Driffil model, which stressed that unemployment varies with labor union centralization (since more centralized unions are better at delivering wage moderation), and the Soskice-Iversen model, which stressed that unemployment varies with the independence and policies of central banks (since union moderation is encouraged by nonaccommodating monetary policy, which adjusts to cancel out wage inflation that exceeds productivity growth). Mares notes, however, that in most cases, neither union centralization nor monetary policy institutions have varied as much as unemployment over time—leaving these models better able to account for cross-national variation than for cross-temporal patterns.
The author solves this puzzle with a focus on the role of expanding welfare-state benefits in encouraging wage moderation. The literature, she suggests, has overemphasized the importance of wages in union demands. When offered nonwage benefits, unions often happily moderate wage increases, which bolsters employment. Her core analysis of European unemployment levels over time is that this trade-off functioned well for several decades after World War II, as welfare states arose and expanded but then stopped working. Eventually, welfare states became so expensive that governments could not continue to buy wage moderation. A rise in the percentage of nonwage benefits going to “labor market outsiders”—workers not involved in classic wage bargaining—also weakened incentives for unions to restrain themselves. Even when unions continued to make fairly modest demands, wage moderation also simply mattered less in maintaining employment. Welfare-state expenses meant that wages had become a smaller part of overall labor costs, and so wage deals had less effect on competitiveness.
Mares develops this argument as a formal model and demonstrates its power in a quantitative analysis of Organization for Economic Cooperation and Development economies from 1960 to 1995. She then traces the logic of the model in three long case studies of Sweden, Germany, and Britain across the postwar period. The conclusion surveys the many recent “social pacts” across Europe that feature wage-moderation-for-benefits deals.
The book's key novelty—though foreshadowed, as she notes, by “informal conjectures” from Peter Katzenstein and Gøsta Esping-Andersen (p. 223)—is to supplement earlier attention to wage bargaining with an emphasis on taxation and social policies. “One cannot understand the major turning points in the wage policies pursued by labor movements or the mix between militancy and restraint,” she summarizes, “without specifying key developments in the policies of social protection” (p. 223). On the one hand, this basic observation clearly makes sense. Unions have cared a good deal about nonwage benefits, and do today in negotiations over “social pacts.” On the other hand, the observation makes so much sense that it seems hard to imagine that previous theorists have overlooked it. Could it really be the case, as she writes, that it is “odd” and “surprising” that the literature on unemployment has “omitted” attention to the rising costs of labor associated with the maturation of the welfare state (p. 36)?
The key weakness of the book is that its presentational stress on novel attention to welfare states obscures where it stands in broader theoretical debates. A theorist of Mares's sophistication surely knows that her predecessors' “omission” of rising welfare-state costs is conscious and intentional. Almost all of the institutionalist political-economy literature on which she builds is voiced in opposition—explicit or implicit—to the neoclassical attribution of unemployment to high wages, costly social benefits, and inflexible firing. Scholars in this tradition have rarely fully rejected the notion that high labor costs and restraints on firing can raise unemployment, but they have focused on how other institutional features have greater effects on cross-national variation and in at least some periods of cross-temporal variation. The author is persuasive that fusing this focus with some neoclassical common wisdom—that unemployment rises when workers get paid too much or get too many benefits—gives us a better model of labor market performance across space and time. In theoretical terms, however, the result feels like a “yes, but” argument. It combines both sides of a long-standing debate without acknowledging its middle-ground status, and without much attempt to identify more distinctive subrelationships within the mix.
Other problems further suggest that this productive, widely admired scholar may have pushed the manuscript forward too quickly. The language is frequently repetitive or hard to follow. The case studies are very long and offer little signposting of analytic claims along the way, ending in short conclusions that assert that the narrative shows that some dynamics of the model are operating to some extent. The cases appear as separate process-tracing illustrations, without much explicit comparison. The reader is left wondering, for example, why wage moderation seems so similar in Sweden, Germany, and Britain in the 1950s and early 1960s. Certainly this period best showcases her basic process in all three cases: Fairly centralized unions discipline their ranks (British centralized bargaining breaks down later), and rising welfare benefits purchase wage moderation. But Swedish and German unions are more centralized and are getting a much better deal in benefits, and so it seems as though Mares should see the modesty of British-worker demands as more surprising than she does. Again we wish we could hear more about more focused analytic segments and comparisons within her multipart model.
In sum, Mares offers a thought-provoking intervention on a major theme in European political economy. The book is impressive for its ambitious scope and in integrating a variety of insights into a coherent model. The unemployment literature was due for more attention to the welfare-state burdens that so preoccupy today's European policymakers. To find a strongly distinctive theoretical understanding of European unemployment, however, we must hope that she sharpens her approach in future work.
