Trade Unions and Transfer Payments: When are They Reasons to Prefer Democracy to Dictatorship?
UC Davis Working Paper #97-25
Posted: 3 Apr 1998
Date Written: September, 1997
Under dictatorship, trade unions and strikes are illegal, and so wages are low and employment is full. Under democracy, there are two institutional innovations: trade unions, which can keep the wage about the Walrasian level, and the citizen franchise, by which citizens may vote transfer payments to the unemployed. I model the dictatorial equilibrium as Walrasian, and the democratic equilibrium as the Nash equilibrium of a game played between voters and union members-more formally, between the median voter and the median worker. These two individuals are different, because the polity consists of workers and asset-holders-the latter vote, but supply capital rather than labor.
In the move from dictatorship to democracy, the worker exchanges the sure-thing of a low wage to a lottery between a higher wage (if employed) and a transfer payment (if unemployed). Workers are differentiated according to their skill. I calculate the size of the coalition of workers that favors the democratic equilibrium over the dictatorial equilibrium, as a parameter of economic development increases. For a class of CES production functions, it is indeed the case that the democracy-favoring coalition grows with economic development. This is not true, however, for the Cobb-Douglas production function.
JEL Classification: D70, D72, O1
Suggested Citation: Suggested Citation