Close families, closed labor markets
Close families and flexible labor markets don’t go together. That’s the conclusion of a fascinating paper by a quartet of transatlantic economists. Their work should be required reading for all European politicians and for the economists and pundits around the world who seek to advise them.
One truth universally acknowledged in Europe today is that the countries of the south need to overhaul their labor markets: Rigid rules on hiring and firing and on the minimum wage are blamed for the high unemployment and subpar economic growth in these states.
Economists are right to point out that inflexible labor markets exact a high economic toll. So why has there been such resistance in countries like Spain and Italy to changes that would create more jobs and stronger growth? One classic answer is the ability of vested interests – workers who do have protected jobs – to defend their own cushy deal at the expense of everyone else. Another is political dysfunction.
Alberto F. Alesina, Yann Algan, Pierre Cahuc and Paola Giuliano – the four authors of “Family Values and the Regulation of Labor” – wondered whether deeper, cultural factors might also be at play.
In their cross-country comparison, the researchers found a correlation between close family ties and a preference for more regulated labor markets. In countries with weaker family ties, there was more support for more open labor markets.
That doesn’t mean the people in countries with close family ties are acting irrationally. Instead, rigid labor markets – notwithstanding their economic costs – might actually be a better choice for societies with close family ties.
Here is how Giuliano, an assistant professor at the University of California at Los Angeles, Anderson School of Management, explained the trade-offs: “Suppose you live in a strong family tie society. You don’t want to go far away from home, so you are tied to a certain geographical location. The company that dominates a specific area knows you don’t want to leave to search for a better job, so it offers you a low wage. For that reason, people in those societies may prefer more regulated labor markets.”
The work by Giuliano and her colleagues is a timely rebuke to the one-size-fits-all school of economics.
“It could be that those regulations that economists consider effective actually work in some societies and not others,” Giuliano told me by phone from Rome. “If you make the labor market more flexible, in some countries this reform will work. But if the cultural beliefs are different, the reforms can produce unexpected results.”
This cultural lens also offers a possible explanation for the remarkable tolerance of some countries, like those of southern Europe, for high unemployment. A study by the economists Samuel Bentolila and Andrea Ichino argues that close family ties are the key to this mystery as well.
“In some sense, unemployment is less painful near the Mediterranean,” they write. That is because extended family networks cushion the blow: “The evidence supports the hypothesis that extended family networks, which appear to be stronger near the Mediterranean, provide a fundamental source of insurance against unemployment in southern Europe.” If you can count on your family to support you, being unemployed isn’t as hard; but staying close to that same family may lead you to favor the rigid labor markets that contribute to your own unemployment.
Giuliano is no flat-earther. She left her native Sicily, first to study in Milan and now to work in the United States, and she took pains to insist that, like the overwhelming majority of the economic fraternity, she believes southern Europe needs to reform its labor markets.
Her point is that those reforms will work best if economists take the time to understand the cultural conditions that prompted societies to choose highly regulated systems in the first place. “Economists should understand that when they introduce reforms, they need to take into account cultural conditions,” she said.
One reason culture matters so much is that it is remarkably persistent. For a civilian, one of the most striking findings in the paper by Giuliano and her colleagues is the correlation between family patterns in the Middle Ages and current desires for labor market regulation.
Your country’s family structure centuries ago influences how you feel about the minimum wage and severance rules. And the power of culture persists even in immigration. Giuliano and her colleagues found that the attitudes and the economic circumstances of second-generation immigrants to the United States were shaped by the nature of family relations in their countries of origin – “today as well as 70 years ago, immigrants coming from strong family ties societies tended to have lower mobility rates, lower wages and a higher level of unemployment.”
These findings are most relevant to Europe and its raging debate about labor rules. But they also make interesting reading in the United States, where the most ardent advocates of liberal labor markets are also the most vocal defenders of family values. Led most recently by the scholar Charles Murray, the American right has been lamenting the decline of those family values within the white working class. Perhaps the unregulated labor markets that conservatives also champion are partly to blame.
One question Giuliano and her colleagues don’t ask is how technology might change the trade-offs between flexible labor markets and close families. Jane Austen’s heroine Elizabeth Bennet observes that distance between family members is a function of wealth. It is also a function of technology. In the age of Skype, Facebook and cheap air travel, 300 miles today may be closer than 30 miles was a century ago. This could be yet another quandary that we assume to be the province of economists and legislators, but turns out to be solved by technologists.