Unemployment, redistribution and the economic origins of party-system fragmentation : theory and evidence

This paper departs from the main strand in the literature, that studies the impact of political institutions on economic outcomes, and explores systematically the economic origins of the party-system and of its institutions. We focus on the impact that unemployment has on party-system fragmentation via redistributive voting. Employing a four-party model with two dimensions of choice (economic policy and ideology), we uncover a non-monotonic relationship between unemployment and fragmentation that traditional voting theories so far ignored. In equilibrium, big parties woo the group of unemployed voters who are relatively more willing to switch their votes in response to more generous redistribution (e.g. higher public spending) �nanced through taxes on labor income. When the tax-base is large enough, allowing for more redistribution, an increase in unemployment favors the big parties by increasing the amount of "swing-voters" that are up for grabs. Hence, fragmentation initially declines before taking the uphill. Using data from OECD economies, we con�rm empirically this reverse relationship between economic and political outcomes. We �nd that variation in unemployment alone can account for two-thirds of the variation in party-system fragmentation. In fact, the economy is the single most important determinant of party-system structure in a democracy. We provide an alternative test using data from Greek local elections to exploit the information shock on the true level of debt as a natural experiment. We �nd that public spending cuts caused an increase in fragmentation. We con�rm again the non-monotonic relationship between unemployment and fragmentation, as public spending became scarcer. Overall, our model lays the theoretical and empirical framework that relates economic outcomes with party-system structure by endogenizing parties�preferences over redistribution and unemployment. It can also explain why party-systems with similar structural characteristics exhibit di¤erential degrees of tolerance for unemployment. Finally, it highlights the importance of institutional and �scal constraints in guaranteeing political pluralism