Opinion

Chrystia Freeland

Close families, closed labor markets

By Chrystia Freeland
June 15, 2012

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.

Comments
12 comments so far | RSS Comments RSS

Giuliano’s ideas are flawed, and, I can only guess, funded by corporate interests. Consider a related issue in the United States, the corrupt H1B Visa program.

The H1B visa program has destroyed the American middle class.

It’s really a simple case of supply and demand. Consider an analogy. Consider, for example, what would happen if H1B were applied to plumbers instead of engineers.

Pick any city, let’s say, Denver, Colorado. Now, bring in 100 busloads of freshly graduated plumbers (4,000 new plumbers), from outside America, who want to enter into the plumbing business in Denver, and make a living.

The result? Wage rates for plumbers will become depressed. The existing 960 plumbers in Denver, once busy every day, and making a good living, will now have much less work, or no work at all.

Who can compete with improverished hordes of plumbers from India who will work for any price. India has 1.17 BILLION people, and many of them are coming here, flooding our labor markets.

The H1B visa law was created, written and lobbied for by large American corporations as a means for decreasing their engineering labor costs. Indeed their corporate profits have zoomed up, up, up — while the wage rates paid to their American engineers have gone down, down, down.

This is what the H1B visa has done to the American engineering profession. H1B has already brought in over one million foreign engineers to America, thus driving down wages, closing American engineering schools, and discouraging American kids from majoring in engineering.

Giuliano misses that point, and has it backwards.

Posted by AdamSmith | Report as abusive
 

Certainly, many of Europe’s labor markets are in desperate need of reform, and cultural differences should be taken into consideration when implementing those reforms. However, it is not clear whether this study by these 4 economists makes the correct inference. The economists found a correlation between close family ties and more regulated labor markets. They then made a cause and effect inference and decided that the close family ties were the cause of a greater degree of labor market regulation. However, this inference may not be corect. Another possibility is that dysfunctional labor markets (because they are poorly regulated) force individuals to seek support from other sources – such as their families, thus leading to close family ties. I am just drawing attention to the fact that a mere correlation without further evidence should not automatically lead to a specific cause and effect conclusion, which is what these 4 economists did.

Posted by DanToronto | Report as abusive
 

There is no reason whatever to think that societies which have systematically weakened family ties provide better conditions for their members than those which have managed, against powerful central Government pressures, to maintain close families. In fact, the opposite is quite true.

In “modern” centralized authority, “socialized” or even “socialist” States, systematic steps have been taken as a matter of policy to weaken families as a prime building block of society. Instead of “blood” tying and binding people together in mutually protective groups, the State (and whoever happens to control it at the moment) presumes to take responsibility for family members. The family heirarchy is not only obsolete but a bar to “progress”. The State tells who who is in your group. It is not up to you. The State will take care of you in need. The State commands your ability to fight, both physically and financially, rather than your family. When you need support, you can depend on the State.

Just ask the Greeks how reliable the State is. Ask Americans, with their bankrupt Ponzi scheme “retirement” and “health insurance” schemes used to fund aggressive pointless wars. And now ready to abandon their “children” because they cannot “afford” to keep their “obligations” and do other things they want.

No, the lesson of the modern world is that Governments are highly unreliable as providers of protection and security, but excellent at making false promises and taking the public’s money with fraudulent intent. The last thing anyone anywhere on this planet needs is stronger central authority and weakened families. Individuals stand a chance with their own families, but no chance at all with someone else’s Government.

Posted by usagadfly | Report as abusive
 

Fascinating.

Posted by BluePelican | Report as abusive
 

“Economists are right to point out that inflexible labor markets exact a high economic toll.” on who?

hmm,……some how that implies that we should all be lowering our wages, to compete with Chinese and indian labor.

we should accept the fact that robotics, and other highly capitalized tools have a natural right to our incomes.

some of the assumptions in this article are questionable.

Posted by Robertla | Report as abusive
 

Further evidence that -

“Bentham’s goal of the greatest good for the greatest number” cannot be realized “for two reasons, each sufficient by itself. The first is a theoretical one. It is not mathematically possible to maximize for two (or more) variables at the same time. This was clearly stated by von Neumann and Morgenstern (3), but the principle is implicit in the theory of partial differential equations, dating back at least to D’Alembert (1717-1783).”

From “The Tragedy of the Commons” by Garrett Hardin, Science 13 December 1968, Vol. 162 no. 3859 pp. 1243-1248, http://www.sciencemag.org/content/162/38 59/1243.full.

Administrative law has been proposed (Hardin, same paper) as the best of a bunch of bad and dubiously effective solutions to any problem, such as the above conundrum studied by Giuliano and colleagues, for which there is no technical solution. Hence, you could say that John Lennon, who said “There are no problems, only solutions,” was not only a dreamer, but that, as Yoko Ono said, “The dream is over.”

Put another way, pick your poison: family, the market, government, mob rule, or some cocktail that mixes some of each. I suggest we try to hit the toilet when we react to the side effects.

Posted by TobyONottoby | Report as abusive
 

Oh, that second reason of Hardin’s? “The second reason springs directly from biological facts.” For the details, see the article if truly interested.

Posted by TobyONottoby | Report as abusive
 

The article ignores something painfully obvious in the countries concerned: southern Europeans earn substantially less than their northern neighbours. In that situation, it is no wonder people rely on family ties.

Posted by Mariategui | Report as abusive
 

Interesting observations on family ties and job economics. For additional, related perspective, see the book “Trust” by Francis Fukuyama.

Posted by leslie20 | Report as abusive
 

People with dysfunctional culture must change or suffer. The only question is what dysfunctional. Multi-cultural is for the birds. Wen they meet the smart take only the parts of each culture works the best.

Posted by SamuelReich | Report as abusive
 

adamsmith, a guy came from india and the job that he was hired for, 3 american workers had worked had been cycled through over the previous 10 years. After this guy joined, he added 5 more jobs to the company – all filled by american workers.
Keep in mind that a lot of the h1b workers are the cream of wherever they come from, they might take up one job but create many more, as in the real life case above.
But ofcourse some people are going to xenophobes and thats all there is to it.

Posted by Shukla | Report as abusive
 

There sure are cultural factors. If your culture has high unemployment you want things around to make your job stable.

So high unemployment starts with cultural factors limiting competitiveness such as ratting by family ties not performance or education. Then other things are added for more protection.

Posted by SamuelReich | Report as abusive
 

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