In this study, we investigate how structural economic changes constrain an equality project, the public-sector expansion strategy. First, we describe a three-stage process in which a growing productivity gap between the private-manufacturing and public-service sectors disrupts traditional class solidarity. We contend that emerging conflicts between private and public sectors due to public-sector expansion and a growing inter-sectoral productivity gap eventually lead to employment and budget crises, as well as the weakening of coordinated wage-setting institutions. Furthermore, political, institutional, and economic transformations originating from sectoral cleavages and imbalance lead to increased income inequality. We test this argument using an unbalanced panel dataset on 16 advanced industrial democracies from 1971 to 2003. We find that public-sector employment has a strong negative effect on income inequality when the productivity gap between sectors is low. In such situations, public-sector employment fulfills its promise of equality and full employment. However, as the inter-sectoral productivity gap increases, the negative effect of public-sector expansion on income inequality evaporates. The findings suggest that severely uneven productivity gaps due to different degrees of technological innovations significantly weaken and limit the effectiveness of left-wing governments’ policy interventions through public-service expansion.
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