with Gilberto Antonelli and Pinuccia Calia Giovanni Guidetti University of Bologna Institutions, models of capitalism and inequality in income distribution. An empirical investigation with Gilberto Antonelli and Pinuccia Calia 1

The aim of the paper is a) To show and discuss the results obtained until now on both a theoretical perspective and an empirical point of view b) to preliminarily discuss the theoretical basis needed to integrate a sociological and an economic approach for the analysis of inequality. 2

Models of capitalism theory Our hypothesis is that the models of capitalism are key determinants of the level of inequality Inequality of what? At this stage of analysis we focus on inequality in income distribution 3

Institutional complementarities We can have institutional complementarity when two or more institutions interact so that the working and the performance of the institutions involved in this relationship is affected by the working and the operation of the others (Amable, Aoki...) 4

Institutional complementarities - 2 David (1994) applies his analysis of technological lock-in to the analysis of institutional change. Institutional arrangements fit together and so form still more elaborate institutional clusters that are self-reinforcing (David, 1994). 5

Consequences of institutional complementarities The effects of institutional change depend on how these relationships match together and not on the nature of the single institution whose operation is always constrained, hindered or strengthened by the working of other institutions. Positive and negative complementarity relationships. Institutional complementarities make institutional change sticky because the introduction of new institutions or the reform of existing ones has to fit into a cobweb of interrelated institutions. 6

Few important conclusions from the institutionalist/evolutionary literature - A sub-optimal configuration can be stable (Aoki) - We can observe institutional lock-in and path-dependence (David, 1994) 7

Models of capitalism A model of capitalism is a cobweb of complementary institutions which affect the performance of a socio-economic system, based on capitalistic relationships among agents. Six sub-systems: (a) product markets; (b) labour markets; (c) financial system; (d) social protection system; (e) educational system; f) techno-organisational system 8

The drivers of institutional change In order to understand the evolution of a model of capitalism or how an economic system shifts to a different model one has to analyse institutional change In this framework of analysis, efficiency is not the driver (engine) of institutional change. The problem is to understand who the institutional builders are One answer can be: the social dominant bloc. If this is the case the structure of social classes is a determinant of the model of capitalism adopted by a country.

Social classes institutional arrangements The causal link Social classes institutional arrangements model of capitalism degree of inequality 10

Empirical analysis Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5 On the basis of a set of statistical indicators, indicating the operation of the various institutions, we have run a cluster analysis using 1995 and 2010 data. The cluster compositions obtained are: Cluster composition - 1995 Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5 Eastern and Southern Europe Scandinavian Central Europe Asian + Switzerland Anglo-Saxon Czech Republic, Hungary, Ireland, Italy, Poland, Portugal, Slovakia, Spain Denmark, Finland, Norway, Sweden Austria, Belgium, France, Germany, Netherlands Japan, Korea Switzerland Australia, UK, USA 11

Czech Republic, Hungary, Poland, Slovakia Cluster composition – 2010 Cluster 1 Cluster 2 Cluster 3 Cluster 4 Cluster 5 Cluster 6 Ex-Socialist Western Europe Scandinavian Central Europe Asian Anglo-Saxon Czech Republic, Hungary, Poland, Slovakia France, Ireland, Netherlands, Portugal, Spain Denmark, Finland, Norway, Sweden Austria, Belgium, Germany, Italy Japan, Korea Australia, Canada, UK, USA, Switzerland

The dynamics of income inequality 1995-2010 (cluster 2010) 13

Panel regression with unobserved heterogeneity at country level (random effect GLS); Dependent variable: income Gini index; 1995 – 2010; Cluster classification at 2010 Variable (0) (1) (2) (3) (4) (5) (6) Ex-Socialist -5.150** -6.870*** -10.404*** -9.121** -10.829*** -10.557*** -11.761*** Western E. -1.868 -2.375 -3.664* -4.176* -4.570* -4.390* -4.011* Scandinavian -8.618*** -8.637*** -9.085*** -8.952*** -9.257*** -9.409*** -9.609*** Central E. -3.979 -4.091* -5.630** -5.575** -6.101** -6.094** -6.284** Asian -2.303 -2.047 -3.897* -3.317 -4.181* -4.479* -4.884** Year 1996 0.015 0.308 0.392* 0.345 0.406* 0.385* 0.396* 1997 -0.004 0.394 0.583* 0.535* 0.630** 0.606** 0.618** 1998 0.157 0.768** 0.988*** 0.914** 1.066*** 1.032*** 1.029*** 1999 0.163 0.838* 1.192*** 1.128** 1.350*** 1.311*** 1.305*** 2000 0.365 0.834* 1.334*** 1.274** 1.525*** 1.492*** 1.463*** 2001 0.22 1.047** 1.587*** 1.515*** 1.779*** 1.728*** 1.709*** 2002 0.281 1.280*** 1.920*** 1.859*** 2.206*** 2.161*** 2.146*** 2003 0.362 1.345*** 2.079*** 2.036*** 2.420*** 2.373*** 2.354*** 2004 0.609 1.359*** 2.235*** 2.641*** 2.608*** 2.561*** 2005 0.593 1.464*** 2.394*** 2.424*** 2.818*** 2.782*** 2.713*** 2006 0.494 1.304*** 2.316*** 2.322*** 2.787*** 2.742*** 2.686*** 2007 0.421 1.349*** 2.412*** 2.403*** 2.889*** 2.841*** 2.793*** 2008 0.44 1.559*** 2.666*** 2.667*** 3.044*** 2.993*** 2.932*** 2009 0.499 2.553*** 3.737*** 3.713*** 4.340*** 4.261*** 4.242*** 2010 0.679 1.523*** 2.965*** 2.983*** 3.649*** 3.596*** 3.545*** GDP growth (%) 0.151** 0.125** 0.121** 0.109* 0.111* Inflation rate 0.174** 0.165* 0.161* 0.183** 0.177** 0.180** Unemployment rate 0.146* 0.173* 0.149* 0.163* 0.176* Employment in services -0.183* -0.123 -0.166 -0.17 -0.208* LF - secondary education (%)   -0.037 -0.034 LF - tertiary education (%) -0.059 -0.042 -0.047 -0.013 Trade openess 0.006 0.005 0.007 Outward FDI -0.012* -0.011* BERD 0.331 0.355 Constant 32.164*** 29.780*** 42.691*** 42.018*** 44.346*** 44.422*** 44.457*** Theta 0.912 0.914 0.897 0.903 0.893 0.894 0.901 Rho 0.890 0.855 0.868 0.844 0.847 0.864 B-P Test 2144.77*** 2026.65*** 1795.66*** 1730.30*** 1327.06*** 1280.63*** 1482.94*** Hausman Test b (p-value) 7.55 (0.999) Observations 384 R square c 0.51 0.58 0.67 0.71 0.73 0.72 0.69

Key points to be discussed Where do social classes come from? Are they exogenous with respect to income distribution? Are they determinants of income distribution? 15

Conclusions At the moment the empirical analysis has been limited to the relation between model of capitalism and income inequality. We have not analysed the relation between model of capitalism and other dimensions of inequality. All in all, from the cluster analysis one can draw the following conclusions. Persistence of two different models in these 15 years; the Anglo-Saxon model and the Scandinavian one. The analysis has highlighted two other models of capitalism: the Asian model and the ex-socialist one. As to the countries belonging to the ex-socialist cluster, the rise of this cluster (cluster 1 in 2010) evidences the path dependency of institutional change. 16

Conclusions (2) 3) There is no convergence process at work, not even in the European Union. Finally, the European clusters seem to be the most difficult to interpret, as these countries, and the corresponding clusters, swing between the Anglo-Saxon model and the Scandinavian

Few important conclusions from the institutionalist literature (2) It is very important to understand who the institutional builders are Pivotal role of the elites who are able to affect the institutional architecture of an economic system 18