Confronting the Endogeneity of Economy, Policy, and Politics: Inequality & Unemployment, Redistribution & Social Insurance, and Political Participation
34 Pages Posted: 3 Mar 2008
Date Written: 2008
Conflicts of interest over the generosity and structure of redistribution and social insurance (jointly: social policy) include that between the relatively poor and wealthy - which yields the familiar result that median-voter demand for broad redistribution increases in the income skew - and that between the safely employed and the unemployed or precariously employed - in which, instead, inequality reduces median-voter demand for social insurance. In each case, the generosity and structure of social policy may itself affect simultaneously the efficiency of the labor market and the political participation of the less fortunate, which latter affects the identity and so the income and job-security status of the median voter. Previous literature has generally emphasized one of these causal connections to the exclusion of the others, but their combination unavoidably indicates a system of endogenous relations between economic performance (unemployment/income-distribution), social policy (redistribution/social-insurance), and political participation. This paper represents an attempt to elaborate the nature of these endogenous relationships, to suggest plausible identification conditions derived from relevant theory and substance, and to offer empirical estimates of the resulting system of equations. As the system is explicitly nonlinear in endogenous variables (via a linear-interaction term) and implicitly nonlinear in parameters (by that interaction and due to the modeled spatial interdependence), the paper also discusses and offers means of presenting estimated pre-spatiotemporal, first-period post-spatial-dynamics, and spatiotemporal long-run steady-state responses of the system's five outcomes to counterfactuals.
Keywords: Inequality, Unemployment, Redistribution, Social Insurance, Political Participation, System of Equations, Systems Nonlinear in Variables
JEL Classification: C1, C3, C5,C51,D31,D72,D78,E62,F02,F42,H11,H53,J65
Suggested Citation: Suggested Citation