This book explores the political and economic couplings between wage bargaining institutions, macro-economic policy regimes, and the welfare state. Based on a game-theoretic equilibrium model, the first part of the study argues that macro-economic performance (especially unemployment) is the outcome of an interaction between the centralization of the wage bargaining system and the character of the monetary policy regime. Thus, in semi-decentralized (industry-based) bargaining systems where the government is credibly committed to a non-accommodating monetary policy rule, strategic foresight dictates that unions and employers observe price-wage restraint compatible with low unemployment. In highly centralized bargaining systems, by contrast, monetary policy flexibility facilitates distributive compromises among unions, and leads to restrained price-wage behavior. Only in decentralized bargaining systems is money is neutral in the sense that policies have no real economic effects. When institutions are mal-aligned -- centralization coupled with a non-accommodating regime, or semi-decentralization coupled with a flexible regime -- distributive conflicts and price-wage militancy result in poor economic performance. The argument is supported by econometric evidence from 15 organized market economies over a 21-year period. Pareto-superior institutions are collectively preferred by governments and organized interests, but these institutions are politically contested because the particular institutional setup affects the balance of power between different interests and leads to divergent distributional outcomes in terms of wages, unemployment risks, and welfare benefits. The second part of the study is an analysis of this political contest over institutional design. Modeled as a strategic game between the government and cross-class coalitions of unions and employers, changes in the economic, technological, and political environment alter the balance of power and lead to sectoral realignments and institutional reforms. Specifically, the recent trends away from centralized wage bargaining and full employment policies in highly corporatist countries such as Denmark and Sweden are explained as the outcome of cross-class realignments between strategically located unions and employers triggered by the introduction of new production technologies, economic internationalization, and the fiscal crisis of the state. Aimed at increasing wage flexibility, while simultaneously containing cost pressure, the resulting institutional reforms have been associated with greater wage inequality and a re-orientation of government policies toward the pursuit of low inflation and a more "commodified" system of welfare benefits.

This book builds on institutionalist theory in both economics and political science to offer a general political economy framework for the study of welfare capitalism. Based on the key idea that social protection in a modern economy, both inside and outside the state, can be understood as protection of specific investments in human capital, the book offers a systematic explanation of popular preferences for redistributive spending, the economic role of political parties and electoral systems, and labor market stratification (including gender inequality). Contrary to the popular idea that competition in the global economy undermines international differences in the level of social protection, the book argues that these differences are made possible by a high international division of labor. Such a division is what allows firms to specialize in production that requires an abundant supply of workers with specific skills, and hence high demand for protection.