Political ideology and economic freedom
across Canadian provinces
C. Bjørnskov and N. Potrafke
This paper examines how political ideology influenced economic freedom in the
Canadian provinces. We analyze the dataset of economic freedom indicators
compiled by the Fraser Institute in 10 Canadian provinces over the 1981-2005
period and introduce two different indices of political ideology: government and
parliament ideology. The results suggest that government ideology influenced
labor market reforms: market-oriented governments promoted liberalization of
the labor market. Parliamentary ideology did not influence economic liberalization
at all. This finding (1) identifies differences between leftist and rightwing
governments concerning the role of government in the economy and (2)
indicates that ideological polarization concerns governments but less
parliamentary fractions in the Canadian provinces.
JEL Classifications: O51, P16, R11, R50
Keywords: economic freedom, taxation, regulations, ideology, panel data
CEB Working Paper N° 09/054
December 2009
Université Libre de Bruxelles - Solvay Brussels School of Economics and Management
Centre Emile Bernheim
ULB CP145/01 50, avenue F.D. Roosevelt 1050 Brussels BELGIUM
e-mail: [email protected] Tel. : +32 (0)2/650.48.64 Fax : +32 (0)2/650.41.88
Political ideology and economic freedom across Canadian
provinces
Christian Bjørnskov*
Aarhus School of Business, Aarhus University
Niklas Potrafke+
University of Konstanz
December 22, 2009
Abstract:
This paper examines how political ideology influenced economic freedom in the Canadian provinces.
We analyze the dataset of economic freedom indicators compiled by the Fraser Institute in 10 Canadian
provinces over the 1981-2005 period and introduce two different indices of political ideology:
government and parliament ideology. The results suggest that government ideology influenced labor
market reforms: market-oriented governments promoted liberalization of the labor market.
Parliamentary ideology did not influence economic liberalization at all. This finding (1) identifies
differences between leftist and rightwing governments concerning the role of government in the
economy and (2) indicates that ideological polarization concerns governments but less parliamentary
fractions in the Canadian provinces.
Keywords: economic freedom, taxation, regulations, ideology, panel data
JEL Classification: O51, P16, R11, R50
* Aarhus School of Business, Aarhus University, Department of Economics, Frichshuset, Hermodsvej 22, DK-8230
Åbyhøj, Denmark. Email: [email protected].
+
University of Konstanz, Department of Economics, Box 138 D-48457 Berlin, Germany, Email: niklas.potrafke@uni-
konstanz.de.
1
1. Introduction
Government ideology influenced economic policies in the Canadian provinces. Empirical studies
suggest that, for example, leftwing governments pursued more expansionary fiscal policies by
increasing public expenditures while public revenues appear to be less driven by government ideology.
The fact that studies identify ideological effects in fiscal policy is meaningful because the Canadian
constitutions and federal politics leave provincial governments with significant room to maneuver.1 In a
similar vein, labor market regulations and legislation are also primarily the abode of provincial
governments instead of being governed from the federal level. Yet, the influence of government
ideology on labor market regulation and economic liberalization in general has been largely ignored in
the political economy literature. Against the background of the sustained interest in the role of political
ideology in Canadian economic policy, this is a surprising omission, not least since the few crosscountry studies exploring government intervention and liberalization tend to find evidence of partisan
effects (Imbeau et al. 2001).
The ideological structure of provincial parliaments and the variations across different factions
and parties play a significant role in Canadian politics. However, contrary to US politics the Canadian
political system is most often characterized as closely fitting a brokerage model. Only considering the
ideology of the party in government, as previous studies have done, does not provide a comprehensive
picture of political ideology and economic policies in the Canadian provinces. Neither does a static
characterization of party positions, as political parties tend to shift positions on a left-to-right scale over
time. Political economy studies on partisan politics in the Canadian provinces may hence benefit from
addressing parliamentary cohesion and party changes.
1
The political and legal institutions are the same across the ten provinces as are, with Québéc as the exception, the broader
cultural environment. The issue of Francophone Québéc and, in particular, its strong independence movement takes up a
special place in Canadian politics (e.g. Duchesne, Eagles and Erfle, 2003, Hinich et al. 1998). Federalism is one of the
dimensions determining the preferences of Canadian politicians (Cross and Young 2002).
2
In this paper, we consequently examine how political ideology has influenced economic freedom
in the Canadian provinces, taking these challenges into consideration. We analyze the dataset of
economic freedom indicators compiled by the Fraser Institute in ten Canadian provinces over the
1981-2005 period and introduce two different indices of political ideology: government and parliament
ideology. We allow for parties to drift on the left-to-right scale, thus taking party changes into account.
The results suggest that government ideology influenced labor market reforms: market-oriented
governments promoted liberalization of the labor market, but parliamentary ideology did not influence
economic liberalization at all. At a more disaggregated level, we find that the ideological effects on the
labor market are due to more leftwing governments increasing public employment. These findings (1)
identify differences between leftist and rightwing governments concerning the role of government in
the economy and (2) indicate that ideological polarization concerns governments, but less so
parliamentary fractions in the Canadian provinces.
The rest of the paper is organized as follows: Section 2 discusses the related literature on partisan
politics in Canadian provinces and formulates the hypotheses to be tested. Section 3 presents our
indices on political ideology in the Canadian provinces. Section 4 presents the data on economic
freedom and specifies the empirical model. Section 5 reports and discusses the estimation results, and
investigates their robustness. Section 6 concludes.
2. Partisan politics in Canadian provinces
Partisan politics has been a heavily debated topic in empirical political economy. Scholars have
extensively examined to what extent and in which areas government ideology influenced economic
policy (e.g. Hibbs 1977, 1992, Alesina et al. 1997, Imbeau et al. 2001, Bjørnskov 2008). While most
studies are conducted at either a cross-country level or as comparisons between US states (e.g., the
companion paper by Bjørnskov and Potrafke 2009), a small literature deals explicitly with Canada.
3
In the Canadian provinces, existing studies suggest that government ideology has played an
important role in fiscal policy. Consistent with standard partisan theory, leftwing governments pursued
a more expansionary fiscal policy than rightwing governments. In particular, leftwing governments
increased public expenditures (see, for example, Tellier 2006, Pétry et al. 1999) and government
ideology influenced the budget composition (Kneebone and McKenzie 2001, Blais and Nadeau 1992).2
The empirical studies also suggest that electoral motives manipulated fiscal policies in the Canadian
provinces (see also Reid 1998, Imbeau and Tellier 2004, Tellier 2004). At the federal level, electoral
motives influenced public expenditures, while ideology-induced effects were less significant in the
1954-1992 period (Pétry and Harmatz 1995). In the long run, however, neither partisan nor electoral
cycles influenced public expenditures in Canada (Ferris et al. 2008).3
At a more disaggregated level, spending on public health in the Canadian provinces appears to be
driven by government ideology. The results by di Matteo (2009), for example, suggest that center-left
parties are associated with smaller public shares for spending on health professionals and larger shares
for total health spending.4 Ideology-induced responses to globalization tended to depend on the level of
unionization: when unionization was high and globalization was proceeding rapidly, leftwing
governments have reduced public spending in the Canadian provinces (Pickup 2006). When
unionization was low and globalization was proceeding rapidly, leftist governments have implemented
compensatory spending.
Conversely, party affiliation and government ideology do not appear to have an influence on
(air) pollution in Canada. The empirical results by McKitrick (2006) suggest that government’s political
stripe in 13 Canadian cities has not reliably been associated with positive or negative effects on air
2 Political
3
ideology also influenced fiscal policies in the US states. See, for example, Berry et al. (1998).
In general, electoral and partisan cycles did not influence macroeconomic indicators such as GDP and unemployment in
Canada (Serletis and Afxentiou 1998).
4 On
the effects of government subsidies to employer-provided health insurance in the Canadian provinces see, for example,
Stabile (2001).
4
pollution. McKitrick (2006: 616) comes to the conclusion that “on air quality all the leading political
parties seem to favour slow, incremental improvements, with only small differences among parties in
the desired rates of change.”
The implementation of abortion policy – a strongly value-laden question in North America – has
not only appeared to be a controversial issue between leftist and rightwing parties in Canada, but also
between the federal government and the provinces. For example, the Liberal Party which was in power
on the federal level in 1995 opted for abortion services as medically necessary service. The
governments in the provinces, however, such as the conservative one in Alberta as well as the leftwing
government in the prairie province Saskatchewan were opposed to more abortion services (for an
encompassing discussion of Canadian abortion policy from a political economic perspective see, for
example, Palley 2006). In some areas, parties evidently acted differently on their ‘home turf’ than at the
federal level.
There is thus plenty of evidence for partisan ideological effects in Canada, although the evidence
is not uncontested and varies across different purposes. Only few studies, however, take into account
that the political system and political traditions in Canada are somewhat different from those of other
federal nations, and in particular the US.5 Virtually all studies consider the political ideology of the
incumbent government, yet much of the complementary literature on party systems and political
institutions has characterized Canada as a country in which politics mostly resembles the brokerage
model (e.g. Stevenson 1987, Young and Cross 2002). Canadian party positions are known to be
ideologically somewhat opaque. Malloy (2003: 121), for example, assesses that “party platforms are
generally vague and it is typical following elections for governments to embark on major new policies
not mentioned in the general election and with little consultation of parliamentary caucuses”. In
addition, the ideological cohesion of Canadian parties seems relatively weak, as parties more function as
5 Economic
liberalization is, however, a long-run process. For this reason, it is not likely that politicians implement short-run
policy changes to become re-elected. That is why we do not focus on electoral motives in economic liberalization.
5
‘brokers’ between many different factions and individual views represented in the party. As already
weakly cohesive parties try to attract voters, their ideological position becomes less certain, with the
possible exception of the new parties in a system that used to be a ‘two-party plus’ game (Stephenson
and Bélanger 2007). What is the result of a perfect brokerage model is therefore a political game, which
tends to resemble purely Downsian voting where official parties’ ideology would be little more than
cheap talk (Downs 1957). However, contrary to what most people seem to believe, this does not mean
that one cannot have ideological influences on policy choices.
First, Cross and Young (2002) show that Canadian politics have an ideological component when
examining the attitudes of party members. Results in Kam (2001: 115) also suggest that exploring
members’ voting behavior in Westminster style parliamentary systems such as Canada and the United
Kingdom, party affiliation contains “vastly more information about his or her behavior than do his or
her preferences”. Canadian party members, despite the weak ideological cohesion within their parties,
are substantially more disciplined than in particular their American counterparts, at least when voting in
the Canadian House of Commons (Malloy 2003). Instead, Canadian party members behave more like
their North European colleagues than politicians in the US House of Representatives, in which party
dissent is more common (Poole and Rosenthal 2001). As such, simply defining a ‘standard’ position of
a party is sufficient to capture most of the structure of actual voting in the Canadian parliaments.
Second, a perfect brokerage model instead means that the ideology of the governing party/parties
only exerts an influence on policy choices through their relative bargaining power. If, as is the case in
brokerage politics, parties agree across parliamentary divides on what to do, outcomes would
presumably be determined by the bargaining power of each single political position. In addition,
bargains across political divides would presumably be easier given the intra-party diversity of ideological
positions that necessarily follows from weak ideological cohesion, which would tend to create interparty ideological overlaps. In a Canadian and similar contexts, this means that ideological effects on
political outcomes would follow not from the ideological position of the incumbent government, but the
6
average ideological position of the provincial parliament. Hence, even though we expect, on the basis of
the existing literature, to find evidence of partisan political effects across the Canadian provinces, we a
priori cannot hypothesize about which field of politics – the governing party or the entire party system
– is relevant.
Following the implications of the related literature on partisan politics in the Canadian provinces
and government ideology and economic liberalization, the two competing hypotheses to be investigated
in the following are:
1. Market-oriented governments have been more active in economic liberalization in Canadian provinces than
leftwing governments.
2. Government ideology does not matter for policy-making in Canada, but the relative bargaining power of
ideological positions does, given that Canadian politics are characterized by the brokerage model.
To test these hypotheses, we first need a measure of government and parliamentary ideology
consistent across time and provinces.
3. An ideology index for Canadian provinces
Since Castles and Mair’s (1984) pioneering efforts, many attempts have been made at coding ideology
consistently across countries and periods (e.g. Huber and Inglehart 1995, Mair and Castles 1997,
Woldendorp, Keman and Budge 1998, 2000, Bjørnskov 2008, Potrafke 2009a). The literature reflects
three overarching problems when placing parties on a left-right scale: 1) the potential
multidimensionality of political positions; 2) the comparability of scales across countries; and 3) the
stability of scales across time. In the following, we base our argument on the premise that by exploring
the potentially ideological political behavior across Canada, we address the specific problems associated
with whether ideology-induced effects are driven by the position of the government or the ideological
make-up of the provincial parliament.
7
Common to all ideology indices is a fourth underlying problem, the question what ideology is.
Ideology is difficult to define and conceptualize, but most people recognize it when they see it. When
treating ideology with a modicum of scientific precision, a definition is necessary (cf. Gerring 1997).
Most recent studies follow Gerring’s (1997) approach, concluding his survey of the post-WWII
literature by stressing the need for internal coherence in any core definition of ideology. He tries to
differentiate ideology from, e.g., culture or belief-systems by arguing that a set of values “becomes
ideological only insofar as it specifies a concrete program, a set of issue-positions” (Gerring 1997: 975).
Any measure of political ideology thus has to rest on a coherent and consistent program, associating
issue-positions with preferred outcomes or actions, although this program may only be implicit.
Our political ideology coding does not suffer from comparability problems across objects as we
only deal with the Canadian party system and do not make any cross-country comparisons. The analysis
therefore takes place within the same institutional and political setup and broadly similar political
tradition. Second, the coding explicitly addresses the first problem by focusing only on economic
issues, which takes up an important part of Canadian politics (Kam, 2001; Cross and Young, 2002;
Blais et al., 2004). Third, as we outline below, we consider a specific source of movements in the
political scale to address the potential problem of temporal comparisons.
We eventually employ the index illustrated in Figure 1, which allows the three major parties to
take up more than a singular point on the left-to-right line. For example, we distinguish between the
social democrat part of the New Democratic Party, which we ordinarily place at -2/3, and its more
outright socialist faction placed at -1. Likewise, we distinguish between the social liberal faction of the
Liberal party, placed at -1/3, and the business liberal faction, which we place at 0 and consider the
‘standard position’ of the party. Finally, the Progressive Conservative Party is spread between Red
Tories at 1/3, the ‘standard’ position of the party at 2/3, and a clear right wing at 1, which would be
comparable to the Republican Party in the US during the Reagan years.
8
This implies that, accepting our coding, we are also able to distinguish between provincial
governments lead by different factions of each party. For example, at the federal level we would place
the liberal governments under Jean Paul Chrétien as social liberal, but those of his successor Paul
Martin as business liberal.6 At the provincial level, all three major parties have also moved their public
profiles among positions. This happened perhaps most clearly when the Alberta conservatives with
Ralph Klein taking over in 1993 moved to the right and away from a Red Tory position. Among
Canadian liberals, examples include the New Brunswick party moving to the right when Frank
McKenna took over the leadership in 1985 and the Newfoundland Liberal Party that moved to a
similar business liberal position during the leadership of Clyde Wells. Even the New Democratic Party
experienced ideological moves, although it otherwise seems more cohesive than the two larger
counterparts (cf. Young and Cross 2002). Apart from the remnants of the ideological battle between
the standard position and ‘The Waffle’, an outright socialist faction in the late 1970s, a move to the
right was for example clear as the Saskatchewan branch moved to a more fiscally austere position when
Roy Romanow took over the leadership from Allan Blakeney in 1988. Across the provinces, relatively
stable differences also exist with the Ontario conservatives being strongly associated with a Red Tory
position and the Québéc liberals placing themselves to the left of most other Canadian liberals and
closer to the Parti Québécois.
Finally, the Social Credit Party and the Reform Party / Canadian Alliance are placed at 1/3 on
the scale while the two parties particular to Québéc, the Parti Québécoise and Action Démocratique,
are placed at -2/3 and -1/3, respectively. A few other small parties that obtained representation are
placed as follows: the Saskatchewan Party (populist rightwing) at .5; the Confederation of Regions (in
New Brunswick) at .5; the Equality Party in Québéc at 1/3; the Representative Party (in Alberta) at .5;
and the Alberta Alliance at 1. We do not consider various minor communist and libertarian parties as
6 We
should stress that the ideology of the federal governments is not included in our econometric model, as it is picked up
by year dummies.
9
they never attained representation within the 1981-2005 period and we code all independent members
of parliament at the middle of the scale, 0.
While this coding clearly has an inevitable subjective element, it retains what is a standard ranking
of Canadian parties and replicates the increasing political span of Canadian politics (e.g. Huber and
Inglehart 1995, Mair and Castles 1997). The results in Cross and Young (2002) reconfirm this ranking
by showing that members of the five parties place themselves accordingly on most issues, and in
particular clearly so on economic issues. We therefore believe that although the validity of the implicit
assumptions of unidimensionality and equidistance may be uncertain, as is the case of all ideology
indices, our coding captures entirely standard features of the basic structure of the Canadian political
system. Our possibility to assign provincial governments to factions within parties allows us to some
extent to take party changes into account. This additional flexibility solves at least some of the problem
in the literature associated with shifting party positions and accompanying scale instability of ideology
indices (Knight 2006, Berry et al. 2007, Potrafke 2008).7
To illustrate the structure of our index, Figure 2 shows the average ideology of the provincial
parliaments across the 1981-2005 period, measured as either the average ideology of votes, seats or
governments. Interestingly, the figure not only depicts the substantial differences across the ten
provinces, but also the discrepancy between the average ideology of voters and that of the resulting
parliaments and governments. This discrepancy, which is partially a result of the Westminster style,
first-past-the-post institution of Canadian democracy, means that the distribution of seats is somewhat
more variable than that of votes, and the distribution of governments even more so; we therefore
employ the distribution of seats instead of votes to calculate the average parliamentary position. Yet,
the data also emphasize the substantial difference in what may be termed ideological ‘traditions’ across
7
It may be important to emphasize that we coded all Canadian parties, and thereby all provincial governments and
parliaments, before exploring the data on economic freedom. As far as possible, we have therefore tried to prevent any bias
due to knowledge of our dependent variables entering our ideological coding choices.
10
the ten provinces with Québéc substantially more leftwing than other provinces and Alberta the most
conservative province.
While Figure 2 shows the long-run spatial ideological differences across Canada, Figure 3
illustrates the development of average ideology over time across the ten provinces since 1981. Again,
Figure 3 illustrates how a first-past-the-post system tends to scale up the parliamentary consequences of
ideological movements among voters and the massive loss of voters suffered by the Progressive
Conservative Party after its heyday when it colloquially was referred to as ‘The Big Blue Machine’.
While average ideology had trended slightly to the left since 1981, the almost violent demise of the
Tories came about after a series of allegations of high-level corruption and nepotism (e.g. Kaplan 2000
who documents that the scandals were unfounded). From the late 1990s onwards, the conservative
party has regained its status as several provincial parties distanced themselves from the federal
Progressive Conservative Party and also moved away from Red Tory positions to more clearly
ideological platforms.
Averaging economic freedom (as defined below) across the ten provinces reveals an ideological
pattern, as the correlation over time between overall economic freedom and the average ideology of the
provincial parliaments is .39, using our ideology index based on the distribution of seats, .37 using the
ideology index based on the distribution of votes, and .71 using the average ideology of governments.
In the following, we explore this association in substantially more detail across both time and provinces
during the 1981-2005 period.
4. Data and estimation strategy
4.1 Data on economic freedom in the Canadian Provinces
We use the dataset on economic freedom in the Canadian provinces first introduced by
Karabegovic et al. (2003). This dataset, which is available for the 1981-2005 period, contains yearly data
11
for the ten Canadian provinces: Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland,
Nova Scotia, Ontario, Prince Edward Island, Quebec and Saskatchewan (balanced panel).
The index of economic freedom includes three components: 1) the size of government, capturing
general government consumption expenditure (percent of GDP), transfers and subsidies (percent of
GDP), and social security payments (percent of GDP); 2) the tax structure, measured as an index
equally weighing tax revenue (percent of GDP), the top marginal tax rate and its applied income
threshold, indirect tax revenue (percent of GDP) and sales taxes (percent of GDP); and 3) labor market
freedom, measured as the extent of minimum wage legislation, government employment (percent of
total provincial employment) and union density. The overall indicators take on values between 0
(minimum of economic freedom) and 10 (maximum of economic freedom). When we in the following
split one of the three components into its constituent parts, we use the original, non-indexed data.
Figure 4 illustrates that average economic freedom in the analyzed sectors was quite moderate
in the 1980s, but remarkably decreased in the beginning of the 1990s in Canadian provinces. Since
1992, economic liberalization has proceeded steadily. Over the 1993-2005 period, changes have been
made in most of the areas covered by the indicators, but most spectacularly in the size of government,
and to a lesser extent, in labor market freedom. Figure 5 illustrates that overall economic freedom was
most pronounced in Alberta (overall index on average 6.8) and less pronounced in Newfoundland
(overall index on average 3.9) and Quebec (overall index on average 4.0). In Newfoundland, however,
overall economic liberalization was proceeding rapidly till the middle of the 1990s. In Ontario, the
overall index dropped from 5.9 in 1989 to 4.6 in 1993, an effect mostly driven by state intervention in
the government sector (Figure 6). In a similar vein, Figure 6 also shows that the evident economic
liberalization process in Newfoundland mainly reflected a dramatically decreasing size of government
while the component of economic freedom concerning “Takings and discriminatory taxation” (Figure
7) changed comparatively less. In Prince Edward Island, for example, the index on “Takings and
discriminatory taxation” even decreased from 6.2 in 1981 to 4.4 in 2005. Finally, Canadian labor
12
markets became more flexible over time (Figure 8). Labor market deregulation was proceeding fast in
provinces such as New Brunswick, Newfoundland and Nova Scotia. We will use these four indicators
on “Overall economic freedom”, “Size of government”, “Takings and discriminatory taxation” and
“Labor market freedom” as dependent variables in the econometric model.
4.2 Empirical model
The basic panel data model has the following form:
Δln Economic Freedom Indexijt = α Ideologyit + Σk βk Δln Xikt + βl Zilt + ηi + εt + uijt
with i=1,…,10; j = 1,…, 4; k=1,…,3; l=1,…,2; t=1,...,24
(1)
where the dependent variable Δln Economic Freedom Indexijt denotes the growth rate of economic
freedom index j. We distinguish between the four indicators of “Overall economic freedom”, “Size of
government”, “Takings and discriminatory taxation” and “Labor market freedom”. Panel data unit root
tests show that these series are stationary in growth rates. Ideologyit describes the ideological
orientation of the respective government or parliament as discussed in the previous section. Σk Δln Xikt
contains two exogenous economic control variables. We follow the related studies on economic
reforms to address potential economic crises and therefore include the five-year average of the
unemployment rate, and international trade (outside Canada) as an approximation of globalization to
address an overall trend in economic liberalization. Following Dickson (2009), we also control for the
level of political competition by including the Herfindahl-Hirschman index of parliamentary
competition because economic reforms are expected to proceed rapidly when political competition is
strong (Dickson 2009 has identified political competition to foster public spending in Canada). The
13
appendix provides descriptive statistics of all variables included. Lastly, ηi represents a fixed province
effect, εt is a fixed period effect and uijt describes an error term.
We now turn to our choice of estimation procedure. We estimate the model with feasible
generalized least squares and implement heteroscedastic and autocorrelation consistent (HAC) NeweyWest type (Newey and West 1987) standard errors and variance-covariance estimates, since a
Wooldridge test (Wooldridge 2002: 176-177) for serial correlation in the idiosyncratic errors of a linear
static panel-data model implies the existence of unrestricted serial correlation when the indicators for
“Takings and discriminatory taxation” and “Labor market freedom” are used.
5. Results
5.1 Basic Results
Table 1 illustrates the regression results when the government ideology index is used and
reports the coefficients and t-statistics (in absolute terms) for every single equation. The two economic
control variables – five-year average of the unemployment rate and the external trade variable – mostly
turn out to be statistically significant although the latter has a positive influence on labor market
freedom (column 4) which is statistically significant at the 1% level. An F-test of the joint inclusion of
the fixed period effects is strongly significant, which indicates time dependence of the dependent
variables, i.e., a joint national trend. On the other hand, economic liberalization did not depend on
political competition as the Herfindahl-Hirschman index does not turn out to be statistically significant
across all equations.
The main results in Table 1 show that government ideology did not influence overall economic
liberalization (column 1), the sub-indicators on the size of government (column 2) or takings and
discriminatory taxation (column 3). However, it has had a strong influence on labor market freedom:
more market-oriented and rightwing provincial governments have been more active in promoting labor
market freedom (column 4), an effect that is statistically significant at the 5% level. The effect is also
14
economically significant as the numerical meaning is that a corresponding increase of the ideology
variable by one point – say from -1/3 (a left-leaning Liberal government) to 2/3 (a standard
conservative government) – would increase the growth rate of the labor market freedom indicator by
about 1.5%.
Table 2 provides the results when the parliament ideology index is used. This provides our test
of the competing hypothesis that only the ideological make-up of the entire parliament ought to matter,
given that Canadian provincial policy-making is indeed characterized by the brokerage model. As
expected, the influence of the control variables does not change compared to the results in Table 1.
The parliament ideology index (rightwing), nevertheless, lacks statistical significance across all
specifications. The results thus indicate that parliament ideology did not influence economic
liberalization in the Canadian provinces at all. In other words, we do not find evidence of the type of
ideological effects that would be consistent with a perfect brokerage type of politics.
5.2 Robustness of the results
We checked the robustness of the results in several ways. First, we discuss an alternative
econometric specification using a dynamic estimation procedure as it is important to note that the
common fixed-effect estimator is biased when including a lagged dependent variable. The estimators
taking into account the resulting bias can be broadly grouped into a class of instrumental estimators and
a class of direct bias corrected estimators (see Behr 2003 for a discussion). In accordance with large
sample properties of GMM methods, e.g., the estimator proposed by Arellano and Bond (1991) will be
biased in an econometric model with N=10, such as in this paper. For this reason, bias corrected
estimators are more appropriate. We apply Bruno’s (2005a, 2005b) bias corrected least squares dummy
variable estimator for dynamic panel data models with small N.8
8
We use the Blundell-Bond (1998) estimator as the initial estimator with which the instruments are collapsed as suggested
by Roodman (2006). Applying this procedure ensures not to use invalid and too many instruments (see Roodman 2006 and
15
The regression results reported in Table 3 illustrate that the lagged dependent variable does not
turn out to be statistically significant in all specifications. The inferences with respect to the
government ideology variables on economic liberalization do not change at all. Market-oriented
governments have been more active in promoting labor market freedom. We will focus on this effect
and stress the robustness of this finding.
Table 4 shows results illustrating the robustness of the government ideology-induced effect on
labor market freedom. To avoid any concerns about potential endogeneity problems of, for example,
the trade variable, columns (1) and (2) show parsimonious specifications in which solely the
government ideology variable (column 1) and the lagged dependent variable (column 2) are included.
We have included further economic control variables such as trade between the Canadian provinces
(trade inside Canada), GDP per capita in period t-1 and the size of government (total government final
consumption expenditure as a share of GDP). It is important to note that purchasing-power parity data
on GDP per capita at the provincial level are only available since 1981, such that we could not employ a
five-year average without significantly reducing the sample. Yet GDP per capita in period t-1 does not
turn out to be statistically significant and its inclusion does not change the inferences at all. In any
event, the government ideology-induced effect on labor market freedom turns out to be robust and
negative throughout.
Political decisions to liberalize the economy may well need time to be implemented, and the
political color of the government may change during this period. For this reason one may want to
include lagged government ideology variables. When a single party has been in power for a fairly long
time, however, lagged government ideology is less convincing because this particular party has been in
2009 for further details). Following Bloom et al. (2007), we undertake 50 repetitions of the procedure to bootstrap the
estimated standard errors. Bootstrapping the standard errors is common practice applying this estimator, as Monte Carlo
simulations demonstrate that the analytical variance estimator performs poorly for large coefficients of the lagged dependent
variable (see Bruno 2005b for further details). The results do not qualitatively change with more repetitions such as 100, 200
or 500 as well as when the Arellano-Bond (1991) estimator is chosen as initial estimator.
16
office sufficiently long to implement its ideology-induced policy. In any event, to address potential
time-lagged ideology effects on labor market freedom, we have replaced the government ideology
variable in period t by its lagged values in the periods t-1, t-2 and t-3. The results show that influence
(point estimate and statistical significance) of the lagged government ideology in period t-1 on labor
market reform strongly increases. The influence of lagged government ideology in period t-2, however,
is weaker than in period t, while the influence of lagged government ideology in period t-3 is similar to
the influence of government ideology in period t.
A caveat applying to all panel data models concerns potential endogeneity of the explanatory
variables. It is, however, not reasonable to expect that government ideology is influenced by changes in
labor market freedom in the Canadian Provinces. Good instrumental variables for government ideology
are simply not available, consistent with the prevalent view that voters decide based on predominantly
non-economic information (e.g., Nannestad and Paldam 1997). Moreover, instrumenting ideology with
the help of lagged government ideology would not be reasonable because ideology is highly persistent.
The reported effects could depend on idiosyncratic circumstances in the individual provinces.
We have therefore tested whether the results are sensitive to the inclusion/exclusion of particular
provinces. We note that the influence of the ideology variable declines when Manitoba is excluded but
increases when Saskatchewan is excluded. However, our main findings with respect to labor market
freedom remain robust.
5.3. Decomposing labor market freedom
While the results above show that political ideology influenced labor market deregulation in the
Canadian provinces, they do not inform about which aspects of the labor market were affected. We
therefore split the labor market freedom indicator into its three components: the extent of minimum
wage legislation, the share government employment in total employment, and union density.
17
The results in Table 5 show that the political ideology of incumbent governments did not
influence minimum wage legislation. Conversely, the results show that the finding pertaining to overall
labor market freedom is driven by the other two components. Decomposing the index thus reveals that
leftwing provincial governments in general expanded government employment, and that union density
also rose under leftwing governments. The coefficients of the government ideology variables on
government employment and union density are statistically significant at the 5% level and imply that
when the government ideology variable increased by 1 point (say from a center to a strong rightwing
government), the growth rate of the government employment share decreased by about 1% and the
growth rate of the union density decreased by about 0.6%.
Government employment is clearly susceptible to political changes, and in particular to changes
in fiscal policy. The influence of government ideology on union density may seem puzzling. However,
unionization may, for example, be higher in the government sector than in the private sector, which
would indicate that the unionization result simply followed from ideological increases in government
employment. We have therefore tested the statistical interaction between the changes in union density
and the changes in government employment, but do not find any association between changes in union
density and changes in government employment. Consequently, decreasing government employment
and deunionization are statistically separate. The result that government ideology is significantly
associated with changes in union density is thus most likely due to union density reflecting overall
ideological changes in society, and not due to a causal effect.
6. Discussion and conclusions
Whether and to what extent the political ideology of government affects policy-making and
institutional choices has been a major question in political economy for decades. In this paper, we
revisit the question by exploring ideological differences across the Canadian provinces over a 25-year
18
period. Due to the special nature of the Canadian political system, we analyze the potential effects of
both the ideological position of the government and the average position within each provincial
parliament. We thus allow for the possibility that ideologically overlapping brokerage parties make
political deals which do not depend directly on government ideology, but on the relative bargaining
power of ideological positions of all parties represented in parliament.
We find that market-oriented governments promoted labor market deregulation in the Canadian
provinces in the 1981-2005 period. Government ideology, however, did not influence overall economic
liberalization; nor did parliamentary ideology influence labor market freedom or any other type of
economic liberalization. These results are robust to including a set of potentially important control
variables and are not driven by any single province, but appear general to Canadian politics. Our
findings have two potentially important implications.
First, our overall results correspond with empirical evidence on government ideology and
economic liberalization in OECD countries where empirical studies suggest that market-oriented
governments have promoted overall economic liberalization (e.g. Pitlik 2007). For example,
government ideology influenced product market deregulation and early-transition privatization in postcommunist countries (e.g., Potrafke, in press; Bjørnskov and Potrafke, 2008). In a similar vein, political
polarization between leftwing and rightwing governments appears to have shifted from budgetary to
non-budgetary affairs (Potrafke 2009b).
The empirical evidence on how government ideology influenced labor market deregulation is
nevertheless somewhat mixed. Botero et al. (2004), for example, examine labor market deregulation in
85 countries and find that leftwing governments have been associated with more stringent labor
regulations than rightwing governments. Across OECD countries only, government ideology merely
influenced reforms of unemployment benefit systems, labor taxes, employment protection legislation
and retirement schemes (Duval 2008). The frequency of EU labor market directives, however, can
19
neither be explained by the partisan composition of the Council, nor by the national level of labor
market regulation (see the case study evidence by Vaubel 2008: 462).
Second, our findings are pertinent since the Canadian political system has been characterized by
political brokerage for several decades. Intra-party ideological cohesion in Canada is known to be
relatively weak although party loyalty is strong and members of parliament are more likely to vote in
line with their party than what is the case in, e.g., the US. The official electoral platforms of parties have
also traditionally been vague and non-committal. Most decisions have therefore been negotiated in ‘the
corridor’ between the leaders of parties covering disparate ideological points of view, which a priori
would lead one to expect that government ideology should not matter for actual policy-making.
Instead, political deals logically ought to be affected only by the relative bargaining strength of parties
represented in parliament. Yet, we find no evidence that any of our measures have been influenced by
the average ideological position of parliament, but evidence to the contrary that the ideological position
of incumbent governments has been important in a particular policy area.
Our results are consequently not in line with the ‘standard’ view of how Canadian politics work
and also appear to imply that the concerns that Canada may be moving towards a ‘one-party-plus’
situation are less significant (cf. Scotto, Stephenson and Kornberg 2004). Given that political ideology
actually works despite party bargaining in a brokerage model, our results confirm that parties continue
to matter. This is consistent with the increasing clarity of ideological positions in more recent years in
which new parties have come to play an active role in some Canadian provinces.
In summary, our study indicates that political ideology can play an important role, even in an
apparently non-ideological political system as the Canadian. Yet, it also shows that the policy area
subject to partisan effects across the provinces does not correspond exactly with what is typically found
in cross-country studies. The overall results therefore question whether one should expect similar
effects across democratic countries. We thus conclude by calling for more research in the way that
20
different institutional and political systems affect the importance of political ideology for policy-making
as well as in which areas ideology comes to be important.
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25
Figure 1. An ideology scale for Canadian parties
-1
-2/3
-1/3
1/3
0
Liberal
New Democratic Party
2/3
Conservative
Parti Québéqoise
Social Credit
Canadian Alliance
Equality Party
Action Démocratique
Reform Party
Saskatchewan Party
Confederation of Regions
26
1
Figure 2. Average ideology, 1981-2005, all provinces
27
Figure 3. Ideological development, population-weighted average across all provinces
28
3
4
5
6
7
Figure 4. Average aggregated economic freedom indicators. 1981-2005. 10 Canadian provinces.
1980
1985
1990
1995
2000
2005
Year
overall
takings_and_discriminatory_taxation
size_of_government
labor_market_freedom
Figure 5. Overall economic freedom indicator. 1981-2005. Single Canadian provinces.
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Ontario
Prince Edward Island
2
4
6
8
2
4
6
8
Alberta
1980
Saskatchewan
2
4
6
8
Quebec
1980
1990
2000
2010 1980
1990
2000
2010
year
Graphs by province
29
1990
2000
2010 1980
1990
2000
2010
Figure 6. Size of government sub indicator. 1981-2005. Single Canadian provinces.
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Ontario
Prince Edward Island
4
6
8
4
6
8
Alberta
1980
2000
2010 1980
1990
2000
2010
Saskatchewan
4
6
8
Quebec
1990
1980
1990
2000
2010 1980
1990
2000
2010
year
Graphs by province
Figure 7. Takings and discriminatory taxation sub indicator. 1981-2005. Single Canadian provinces.
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Ontario
Prince Edward Island
4
6
8
10
4
6
8
10
Alberta
1980
Saskatchewan
4
6
8
10
Quebec
1980
1990
2000
2010 1980
1990
2000
2010
year
Graphs by province
30
1990
2000
2010 1980
1990
2000
2010
Figure 8. Labor market freedom sub indicator. 1981-2005. Single Canadian provinces.
British Columbia
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Ontario
Prince Edward Island
2
3
4
5
6
2
3
4
5
6
Alberta
1980
Saskatchewan
2
3
4
5
6
Quebec
1980
1990
2000
2010 1980
1990
2000
2010
year
Graphs by province
31
1990
2000
2010 1980
1990
2000
2010
Table 1: Regression Results. Heteroskedastic and autocorrelation consistent (HAC) Newey-West
type standard errors. Dependent variable: Growth rates of the economic freedom indicators.
Ideology Government
Ideology Government (rightwing)
Herfindahl-Hirschman Index
(1)
Overall
index
(2)
Size of
government
(3)
Takings and
discr. taxation
(4)
Labor market
freedom
0.0057
[0.92]
-0.0142
[0.26]
0.0027
[0.35]
0.0565
[0.62]
0.0043
[0.68]
-0.1129
[1.43]
0.0148**
[2.82]
-0.0348
[0.47]
Δ ln Unemployment rate
(five-year average)
0.0527
0.005
0.1076
0.0259
[0.52]
[0.04]
[1.05]
[0.23]
0.0411
0.033
0.0548
0.1244***
Δ ln Trade
[0.63]
[0.28]
[0.73]
[3.95]
-0.0439**
-0.0789***
-0.0045
-0.0457**
Constant
[2.71]
[3.67]
[0.19]
[2.62]
Yes
Yes
Yes
Yes
Fixed country effects
Yes
Yes
Yes
Yes
Fixed period effects
240
240
240
240
Observations
10
10
10
10
Number of countries
0.46
0.34
0.43
0.39
R-squared (overall)
Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%
Table 2: Regression Results. Heteroskedastic and autocorrelation consistent (HAC) Newey-West
type standard errors. Dependent variable: Growth rates of the economic freedom indicators.
Ideology Parliament.
Ideology Parliament (rightwing)
Herfindahl-Hirschman Index
(1)
Overall
index
(2)
Size of
government
(3)
Takings and
discr. taxation
(4)
Labor market
freedom
-0.0015
[0.10]
-0.0054
[0.08]
-0.0117
[0.54]
0.0518
[0.53]
0.0028
[0.17]
-0.1031
[1.13]
0.0138
[0.86]
0.0023
[0.03]
Δ ln Unemployment rate
(five-year average)
0.0495
0.001
0.106
0.0216
[0.49]
[0.01]
[1.04]
[0.19]
0.0412
0.0313
0.0555
0.1275***
Δ ln Trade
[0.65]
[0.27]
[0.75]
[4.17]
-0.0429**
-0.0768***
-0.0044
-0.0459**
Constant
[2.46]
[3.46]
[0.17]
[2.64]
Yes
Yes
Yes
Yes
Fixed country effects
Yes
Yes
Yes
Yes
Fixed period effects
240
240
240
240
Observations
10
10
10
10
Number of countries
0.46
0.34
0.43
0.38
R-squared (overall)
Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%
32
Table 3: Regression Results. Dynamic bias corrected estimator. Dependent variable: Growth rates
of the economic freedom indicators.
Ideology Government
Ideology Government (rightwing)
Herfindahl-Hirschman Index
(1)
Overall
index
(2)
Size of
government
(3)
Takings and
discr. taxation
(4)
Labor market
freedom
0.0057
[1.20]
-0.0235
[0.30]
0.0023
[0.28]
0.0578
[0.43]
0.0045
[0.87]
-0.1202
[1.42]
0.0157***
[2.62]
-0.0477
[0.49]
Δ ln Unemployment rate
(five-year average)
0.0516
-0.013
0.1129
0.0242
[0.72]
[0.10]
[1.44]
[0.27]
0.0481
0.0528
0.0557
0.1402***
Δ ln Trade
[1.14]
[0.73]
[1.20]
[2.64]
-0.0108
-0.0655
0.0055
-0.0444
Lagged dependent variable
[0.19]
[1.14]
[0.10]
[0.78]
Yes
Yes
Yes
Yes
Fixed country effects
Yes
Yes
Yes
Yes
Fixed period effects
230
230
230
230
Observations
10
10
10
10
Number of countries
Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%
Table 4: Regression Results. Dependent variable: Growth rates of the labor market freedom
indicator.
Ideology Government
Ideology Government
(rightwing)
(1)
Labor
market
freedom
(2)
Labor
market
freedom
(3)
Labor
market
freedom
(4)
Labor
market
freedom
(5)
Labor
market
freedom
(6)
Labor
market
freedom
0.0145**
[2.85]
0.0151**
[2.47]
0.0146**
[2.80]
-0.015
[0.18]
-0.019
[0.45]
0.0152**
[2.48]
-0.0297
[0.30]
0.0293
[0.20]
0.0116**
[2.84]
0.1905*
[1.97]
-0.0263
[0.44]
-0.6000***
[6.23]
0.0123**
[2.12]
0.1784*
[1.81]
0.0131
[0.10]
-0.6057***
[5.34]
-0.0464
[0.88]
Δ ln Trade (inside Canada)
Δ ln GDP per capita (t-1)
Δ ln Size of Government
Lagged dependent variable
-0.0288
[0.51]
-0.0382
[0.70]
-0.0590***
-0.0700**
-0.033
[4.65]
[3.24]
[1.28]
Yes
Yes
Yes
Yes
Yes
Yes
Fixed country effects
Yes
Yes
Yes
Yes
Yes
Yes
Fixed period effects
240
230
240
230
240
230
Observations
10
10
10
10
10
10
Number of countries
0.45
0.37
0.43
R-squared (overall)
Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%
Constant
33
Table 5: Regression Results. Heteroskedastic and autocorrelation consistent (HAC) Newey-West
type standard errors.
Dependent variable: Growth rates of the subcomponents of the labor market freedom indicator.
Ideology Government
Ideology Government (rightwing)
Herfindahl-Hirschman Index
(1)
Minimum wage
legislation
(2)
Government
employment
-0.0104
[0.95]
0.0024
[0.04]
-0.0099*
[2.11]
-0.0033
[0.04]
Δ ln Unemployment rate
(five-year average)
(3)
Union density
-0.0059*
[2.11]
0.0185
[0.46]
-0.0051
-0.0328
-0.0625
[0.05]
[0.71]
[0.98]
0.0249
-0.0452
-0.0215
Δ ln Trade
[0.43]
[1.59]
[0.54]
0.0071
0.0384***
0.0051
Constant
[0.42]
[3.74]
[0.39]
Yes
Yes
Yes
Fixed country effects
Yes
Yes
Yes
Fixed period effects
240
240
240
Observations
10
10
10
Number of countries
0.30
0.46
0.43
R-squared (overall)
Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%
34
Appendix: Data description and sources
Descriptive Statistics.
Variable
Observations
Mean
Std. Dev.
Min
Max
250
4.95
0.87
2.90
7.70
250
5.74
0.96
3.20
8.50
250
5.50
1.12
3.40
9.10
250
3.60
0.90
1.60
6
Minimum wage legislation
250
47.65
10.68
19.23
78.32
Government employment
250
23.95
3.87
15.52
31.65
Union density
250
34.96
6.65
22.90
57.60
Ideology, governments
Ideology, parliament (seats)
Herfindahl-Hirschmann index,
(seats)
Unemployment rate
(five-year average)
Trade (outside Canada)
(as a share of GDP)
Trade (inside Canada)
(as a share of GDP)
GDP per capita
(real)
Size of Government
(total expenditures as a share
of GDP)
250
250
0.16
0.12
.53
0.29
-1
-.054
1
0.88
Karabegovic et al.
(2003)
Karabegovic et al.
(2003)
Karabegovic et al.
(2003)
Karabegovic et al.
(2003)
Karabegovic et al.
(2003)
Karabegovic et al.
(2003)
Karabegovic et al.
(2003)
Own collection
Own collection
250
0.57
0.18
0.10
1.00
Own collection
250
10.51
3.58
4.22
19.52
250
54.42
17.51
20.13
102.24
250
55.00
14.27
31.49
90.34
250
28241.00
7039.06
16278.41 51597.13
Overall economic freedom
index
Size of government
(sub index)
Takings and discriminatory
taxation (sub index)
Labor market freedom
(sub index)
Source
Statistics Canada (2009)
Statistics Canada (2009)
Statistics Canada (2009)
Statistics Canada (2009)
Statistics Canada (2009)
250
26.47
6.58
35
14.10
43.19