Trade Unions And Transfer Payments: When Are They Reasons To Prefer Democracy To Dictatorship?

Under dictatorship, trade unions and strikes are illegal, and so wages are low and employment is full. Under democracy, there are two institutional innovations: trade unions, which can keep the wage about the Walrasian level, and the citizen franchise, by which citizens may vote transfer payments to the unemployed. I model the dictatorial equilibrium as Walrasian, and the democratic equilibrium as the Nash equilibrium of a game played between voters and union members--more formally, between the median voter and the median worker. These two individuals are different, because the polity consists of workers and asset-holders--the latter vote, but supply capital rather than labor. In the move from dictatorship to democracy, the worker exchanges the sure-thing of a low wage to a lottery between a higher wage (if employed) and a transfer payment (if unemployed). Workers are differentiated according to their skill. I calculate the size of the coalition of workers that favors the democratic equilibrium over the dictatorial equilibrium, as a parameter of economic development increases. For a class of CES production functions, it is indeed the case that the democracy-favoring coalition grows with economic development. This is not true, however, for the Cobb-Douglas production function.