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: ceb@admin.ulb.ac.be Tel. : +32 (0)2/650.48.64 Fax : +32 (0)2/650.41.88

1

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: chbj@asb.dk.

+ University of Konstanz, Department of Economics, Box 138 D-48457 Berlin, Germany, Email: niklas.potrafke@uni-

konstanz.de.

2

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 cross-

country 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).

3

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.

4

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 ideology also influenced fiscal policies in the US states. See, for example, Berry et al. (1998). 3 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).

5

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.

6

‘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 inter-

party 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

7

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.

8

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.

9

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.

10

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.

11

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

12

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

13

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

14

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) Newey-

West 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

15

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

16

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.

17

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.

18

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

19

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 post-

communist 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

20

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

21

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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Figure 1. An ideology scale for Canadian parties

1/3 2/3 1 -1/3 -2/3

New Democratic Party Liberal Conservative

-1 0

Parti Québéqoise Action Démocratique

Social Credit Canadian Alliance

Equality Party

Reform Party Saskatchewan Party

Confederation of Regions

27

Figure 2. Average ideology, 1981-2005, all provinces

28

Figure 3. Ideological development, population-weighted average across all provinces

29

Figure 4. Average aggregated economic freedom indicators. 1981-2005. 10 Canadian provinces.

34

56

7

1980 1985 1990 1995 2000 2005Year

overall size_of_governmenttakings_and_discriminatory_taxation labor_market_freedom

Figure 5. Overall economic freedom indicator. 1981-2005. Single Canadian provinces.

24

68

24

68

24

68

1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alberta British Columbia Manitoba New Brunswick

Newfoundland Nova Scotia Ontario Prince Edward Island

Quebec Saskatchewan

yearGraphs by province

30

Figure 6. Size of government sub indicator. 1981-2005. Single Canadian provinces.

46

84

68

46

8

1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alberta British Columbia Manitoba New Brunswick

Newfoundland Nova Scotia Ontario Prince Edward Island

Quebec Saskatchewan

yearGraphs by province

Figure 7. Takings and discriminatory taxation sub indicator. 1981-2005. Single Canadian provinces.

46

810

46

810

46

810

1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alberta British Columbia Manitoba New Brunswick

Newfoundland Nova Scotia Ontario Prince Edward Island

Quebec Saskatchewan

yearGraphs by province

31

Figure 8. Labor market freedom sub indicator. 1981-2005. Single Canadian provinces.

23

45

62

34

56

23

45

6

1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alberta British Columbia Manitoba New Brunswick

Newfoundland Nova Scotia Ontario Prince Edward Island

Quebec Saskatchewan

yearGraphs by province

32

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

(1) (2) (3) (4)

Overall index

Size of government

Takings and discr. taxation

Labor market freedom

Ideology Government (rightwing) 0.0057 0.0027 0.0043 0.0148** [0.92] [0.35] [0.68] [2.82] Herfindahl-Hirschman Index -0.0142 0.0565 -0.1129 -0.0348 [0.26] [0.62] [1.43] [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] Δ ln Trade 0.0411 0.033 0.0548 0.1244*** [0.63] [0.28] [0.73] [3.95] Constant -0.0439** -0.0789*** -0.0045 -0.0457** [2.71] [3.67] [0.19] [2.62] Fixed country effects Yes Yes Yes Yes Fixed period effects Yes Yes Yes Yes Observations 240 240 240 240 Number of countries 10 10 10 10 R-squared (overall) 0.46 0.34 0.43 0.39

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.

(1) (2) (3) (4)

Overall index

Size of government

Takings and discr. taxation

Labor market freedom

Ideology Parliament (rightwing) -0.0015 -0.0117 0.0028 0.0138 [0.10] [0.54] [0.17] [0.86] Herfindahl-Hirschman Index -0.0054 0.0518 -0.1031 0.0023 [0.08] [0.53] [1.13] [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] Δ ln Trade 0.0412 0.0313 0.0555 0.1275*** [0.65] [0.27] [0.75] [4.17] Constant -0.0429** -0.0768*** -0.0044 -0.0459** [2.46] [3.46] [0.17] [2.64] Fixed country effects Yes Yes Yes Yes Fixed period effects Yes Yes Yes Yes Observations 240 240 240 240 Number of countries 10 10 10 10 R-squared (overall) 0.46 0.34 0.43 0.38

Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

33

Table 3: Regression Results. Dynamic bias corrected estimator. Dependent variable: Growth rates of the economic freedom indicators. Ideology Government

(1) (2) (3) (4)

Overall index

Size of government

Takings and discr. taxation

Labor market freedom

Ideology Government (rightwing) 0.0057 0.0023 0.0045 0.0157*** [1.20] [0.28] [0.87] [2.62] Herfindahl-Hirschman Index -0.0235 0.0578 -0.1202 -0.0477 [0.30] [0.43] [1.42] [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] Δ ln Trade 0.0481 0.0528 0.0557 0.1402*** [1.14] [0.73] [1.20] [2.64] Lagged dependent variable -0.0108 -0.0655 0.0055 -0.0444 [0.19] [1.14] [0.10] [0.78] Fixed country effects Yes Yes Yes Yes Fixed period effects Yes Yes Yes Yes Observations 230 230 230 230 Number of countries 10 10 10 10

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

(1) (2) (3) (4) (5) (6)

Labor market

freedom

Labor market

freedom

Labor market

freedom

Labor market

freedom

Labor market

freedom

Labor market

freedom Ideology Government (rightwing) 0.0145** 0.0151** 0.0146** 0.0152** 0.0116** 0.0123** [2.85] [2.47] [2.80] [2.48] [2.84] [2.12] Δ ln Trade (inside Canada) -0.015 -0.0297 0.1905* 0.1784* [0.18] [0.30] [1.97] [1.81] Δ ln GDP per capita (t-1) -0.019 0.0293 -0.0263 0.0131 [0.45] [0.20] [0.44] [0.10] Δ ln Size of Government -0.6000*** -0.6057*** [6.23] [5.34] Lagged dependent variable -0.0288 -0.0382 -0.0464 [0.51] [0.70] [0.88] Constant -0.0590*** -0.0700** -0.033 [4.65] [3.24] [1.28] Fixed country effects Yes Yes Yes Yes Yes Yes Fixed period effects Yes Yes Yes Yes Yes Yes Observations 240 230 240 230 240 230 Number of countries 10 10 10 10 10 10 R-squared (overall) 0.37 0.43 0.45

Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

34

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

(1) (2) (3)

Minimum wage legislation

Government employment Union density

Ideology Government (rightwing) -0.0104 -0.0099* -0.0059* [0.95] [2.11] [2.11] Herfindahl-Hirschman Index 0.0024 -0.0033 0.0185 [0.04] [0.04] [0.46] Δ ln Unemployment rate (five-year average) -0.0051 -0.0328 -0.0625 [0.05] [0.71] [0.98] Δ ln Trade 0.0249 -0.0452 -0.0215 [0.43] [1.59] [0.54] Constant 0.0071 0.0384*** 0.0051 [0.42] [3.74] [0.39] Fixed country effects Yes Yes Yes Fixed period effects Yes Yes Yes Observations 240 240 240 Number of countries 10 10 10 R-squared (overall) 0.30 0.46 0.43

Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

35

Appendix: Data description and sources Descriptive Statistics. Variable Observations Mean Std. Dev. Min Max Source

Overall economic freedom index 250 4.95 0.87 2.90 7.70 Karabegovic et al.

(2003) Size of government (sub index) 250 5.74 0.96 3.20 8.50 Karabegovic et al.

(2003) Takings and discriminatory taxation (sub index) 250 5.50 1.12 3.40 9.10 Karabegovic et al.

(2003) Labor market freedom (sub index) 250 3.60 0.90 1.60 6 Karabegovic et al.

(2003)

Minimum wage legislation 250 47.65 10.68 19.23 78.32 Karabegovic et al. (2003)

Government employment 250 23.95 3.87 15.52 31.65 Karabegovic et al. (2003)

Union density 250 34.96 6.65 22.90 57.60 Karabegovic et al. (2003)

Ideology, governments 250 0.16 .53 -1 1 Own collection Ideology, parliament (seats) 250 0.12 0.29 -.054 0.88 Own collection Herfindahl-Hirschmann index, (seats) 250 0.57 0.18 0.10 1.00 Own collection

Unemployment rate (five-year average) 250 10.51 3.58 4.22 19.52 Statistics Canada (2009)

Trade (outside Canada) (as a share of GDP) 250 54.42 17.51 20.13 102.24

Statistics Canada (2009)

Trade (inside Canada) (as a share of GDP) 250 55.00 14.27 31.49 90.34

Statistics Canada (2009)

GDP per capita (real) 250 28241.00 7039.06 16278.41 51597.13

Statistics Canada (2009)

Size of Government (total expenditures as a share of GDP) 250 26.47 6.58 14.10 43.19

Statistics Canada (2009)