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The rise of economic inequality and right-wing populism in the last three decades has produced a lively debate about the relationship between democracy and advanced capitalism. A prominent view is that the troubles are rooted in the growing power of global capital and the rich, first reflected in the broad sweep of neoliberal reforms in the 1980s and '90s. This view is a story about capitalism subverting democracy. This piece instead argues that it was democracy that transformed capitalism, and that this transformation laid the foundation for unprecedented prosperity. Yet it also unleashed inequalizing economic and political dynamics that are now proving difficult to reverse.

The political and economic couplings between wage bargaining institutions and macro-economic policy regimes are explored in this article. It is argued that in advanced industrialized democracies with well-organized unions and employers' associations, macro-economic performance (especially unemployment) is the outcome of an interaction between the centralization of the wage bargaining system and the monetary policy regime. Thus, a decentralized bargaining system in which the government is credibly committed to a non-accommodating monetary policy rule poses an institutional alternative to a centralized mode of wage regulation where the government enjoys macro-economic policy flexibility. Based on time-series data from ten highly organized market economies, I show that both of these institutional 'equilibria' produce superior employment performance, but also that the two systems are associated with very different distributional outcomes, and that they are supported by different coalitions of organized interests. In addition to predicting economic outcomes, the proposed model provides a theoretical framework for analysing institutional change in wage bargaining systems and in macro-economic policy regimes. (British Journal of Political Research / FUB)