Close families and flexible labour markets don’t go together. That’s the conclusion of a fascinating paper by a quartet of 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 labour 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 labour markets exact a steep economic toll. So why has there been resistance in countries such as Spain and Italy to changes that would create more jobs and stronger growth? One classic answer is the ability of vested interests – workers who have protected jobs – to defend their own cushy deal at the expense of everyone else. Another is political dysfunction.
Alberto Alesina, Yann Algan, Pierre Cahuc and Paola Giuliano – the four authors of Family Values and the Regulation of Labor – wondered whether 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 labour markets. In countries with weaker family ties, there was more support for more open labour markets.
That doesn’t mean the people in countries with close family ties are acting irrationally. Instead, rigid labour markets – notwithstanding their economic costs – might actually be a better choice for societies with close family ties.
Here is how Ms. Giuliano, an Italian native and now an assistant professor at the University of California, Los Angeles, Anderson School of Management, explained the tradeoffs: “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 labour markets.”
The research 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,” Ms. Giuliano told me. “If you make the labour market more flexible, in some countries this reform will work. But if the cultural beliefs are different, the reforms can produce unexpected results.”
Ms. Giuliano insists that southern Europe needs to reform its labour markets, and 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.
The power of culture persists even after immigration. Ms. 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 labour rules. But they also make interesting reading in the United States, where the most ardent advocates of liberal labour 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 labour markets that conservatives also champion are partly to blame.
One question Ms. Giuliano and her colleagues don’t ask is how technology might change the tradeoffs between flexible labour markets and close families. In the age of Skype, Facebook and cheap air travel, 500 kilometres today may be closer than 50 km was a century ago. This could be yet another quandary that we assume to be the province of economists and legislators, which turns out to be solved by technologists.
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