Redistributing under fiscal constraint: partisanship, debt, inequality and labor market regulation

Labor market regulation varies significantly, both within and between developed democracies. While there has been extensive research and debate in economics on the consequences of labor market regulation, the political causes for levels and changes in labor market regulation have received less scholarly attention. This article investigates a political economy explanation for differences in labor market regulation building on a theoretical argument that labor regulation can be used as a non-fiscal redistribution tool. Consequently, partisanship, the demand for redistribution and government budget constraint jointly determine whether labor market regulation will increase or decrease. Consistent with this argument, panel analyses from 33 OECD countries reveal that labor market regulation increases under left-wing governments that face increased market inequality and high government debt.