What is it About Democracies that Pays Higher Wages

Abstract

Democracy and democratisation are associated with higher manufacturing wages. However, classifying a country as democratic does not highlight what institutional characteristics (if any) may be leading to higher wages within democracies. In order to shed light on this issue, this paper uses a dataset that “decomposes” democracy into six different governance indicators in a panel of 84 countries over the period 1996 to 2009. The evidence suggests that in poor and middle-income countries, greater voice and accountability as well as rule of law will lead to increments in manufacturing wages. It is argued that these characteristics increase wages by allowing for freedom of association and assembly as well as by encouraging greater respect for labour laws. The paper also uncovers some evidence to suggest that greater voice and accountability and rule of law can lead to a fall in wages in more developed nations. It is argued that since more developed countries are undergoing a process of deindustrialisation, more democratic wage bargaining activities will lead to faster downward adjustment of manufacturing wages.

JEL Codes: J30, P48, J89, E02