Politics have an impact on the economy. But has the state of the economy any impact on politics? Can economic fluctuations explain fluctuations in voters’ policy demand? Can the outcome of elections be traced back to changes in growth and unemployment?
In the classical explanation of voting behavior, factors such as class, religion, and structure of the society are used as determinants for policy preferences . The aim of my thesis is to explain short-run fluctuations in policy preferences with short-run fluctuations in the economy. A synthesis can be made of these two approaches. “Short-run” economic variables can explain fluctuations in policy demand from election to election within a country. Trends in policy demand are more often the result of by “long-run” sociological variables, that change slowly over time.
Using a dataset for 23 OECD countries and their elections between 1960 and 1995, I have investigated whether such a model can explain changes in policy sentiments. The results indicate that a high unemployment rate makes the median voter vote more conservative (right). High economic growth makes the median voter vote more radical (left). The sociological variables explain a large part of the political variation between countries.
I argue that the key to understanding these fluctuations is social insurance. The middle class, who constitutes the main segment of the voters in OECD countries, rely on social insurance provided by the welfare state. Their demand for insurance depends on their perception of their future income and job security.
Insurance is considered a normal good – something you want more if your income rises. If the economy prospers, your expected income increases. Consequently, you would like to buy more social insurance. Left parties are known to increase budgets and provide more social insurance – at the price of higher tax payments.
At the day of election, voters cast their vote to signal what kind of public policies they prefer in the forthcoming period. In this way, the vote can be seen as a signal to politicians of how much insurance the public wants. This helps explain why the median voter seems to vote more radical when economic growth is high, which also has strong support in the data.
The need for insurance is, however, not only influenced by the willingness to pay for it. The risk of needing it is just as important. I argue that voters, at the beginning of a recession, fear for their jobs and thus buy more insurance. Consequently, I expect voters to vote more radical if the unemployment rate rises at the time of the election. At this point in time, the welfare state functions as insurance for the middle class. They know that the recession will remove jobs but not whose jobs that is to be lost.
At the bottom of the recession, when the unemployment rate peaks, voters no longer need to fear for their jobs. They have either kept it or lost it. The uncertainty that made voters prefer more insurance is gone. At this point one should expect voters to be less willing to pay taxes since the tax payments will cover the unemployment benefits of the few that lost their job – paid by the many that kept theirs. Consequently, one should expect the median voter to demand more right policies when the unemployment rate is high. The latter prediction has strong support in the data analysis. The prediction that an increase in the unemployment rate prior to the election leads to more radical voting has only some support in the data.
Just as politics influence the economy does the state of the economy influence politics. Voters’ policy demand seems to be influenced by both economic growth and the unemployment rate.