Family Values and the Regulation of Labor Alberto Alesina (Harvard University) Pierre Cahuc (Polytechnique, CREST) Yann Algan (Science Po, OFCE) Paola Giuliano (UCLA) October 2009 1 / 54
Introduction Rigid labor markets are in part responsible for the high European unemployment from the eighties onward In some countries: strong opposition to what many economists would consider e cient labor market reforms Why? 2 / 54
We argue that family values play a crucial role 3 / 54
What is the relation between family values and labor market regulation? The e ciency of exible labor markets requires mobile workers Otherwise, rms can take advantage of the immobility of workers and extract monopsony rents In cultures with strong family ties, moving away from home has utility costs Thus, individuals with strong family ties support regulated labor markets to reduce the monopsony power of rms, even though they produce lower employment 4 / 54
There are complementarities between the strength of family ties and the stringency of labor market regulation Weak family ties exible labor markets Strong family ties rigid labor markets This leads to two equilibria 1 Weak family ties and labor market exibility (Nordic countries) 2 Strong family ties and stringent labor market regulation (Southern European countries) 5 / 54
What can we explain? On the positive side 1 why certain countries have more regulated labor markets than others 2 strong inertia in labor market regulations due to intergenerational transmission of family values On the normative side 1 why rigid labor markets with high unemployment are not necessarily less e cient than exible labor markets with low unemployment 2 why it is so di cult to reform labor markets in many especially Southern and Central European countries 6 / 54
About related research Cultural values and economic outcomes (Guiso, Sapienza and Zingales 2006, JEP, Fernandez and Fogli 2006, JEEA) Cultural values and institutions (Tabellini 2008, JEEA) Our approach: about family values and labor market regulation 7 / 54
1 The model 8 / 54
1 The model 2 Family ties and the demand for labor market regulation 8 / 54
1 The model 2 Family ties and the demand for labor market regulation 3 Persistent e ects of family ties 8 / 54
The model The setup There are two goods: labor and a numeraire good produced with labor Continuum of individuals of mass one Individuals are uniformly located on the [0, 1] line Identical, risk neutral and no preference for leisure Utility = consumption + valuation of family relations 3 stage static model 9 / 54
Stage 1: At birth, each individual is located on the [0, 1] line, on a point where his parents live Individuals choose family values which can be 1 either with strong family ties 2 or with low family ties The choice of family values is irreversible Persons with weak family ties are indi erent between living in their location of birth or elsewhere 10 / 54
The share of individuals with strong family ties is denoted by σ Strong family ties yield utility (σ) > 0 (σ) if immobile if mobile (σ), the valuation of strong family ties, increases with σ 1 social norms more in uent when more spread 2 less opportunities of social interaction for weak family ties when σ increases 11 / 54
Stage 2: People vote to choose labor market regulation according to the majority rule There are two possible types of labor market regulation 1 Labor market exibility (i.e. laissez-faire) 2 Regulation which comprises minimum wage job protection Regulation entails deadweight losses which reduce the production of every worker 12 / 54
Stage 3: In each location, there is a single rm that o ers labor contracts When a worker is employed in his initial location, his productivity is drawn in the uniform distribution on the interval [0, 1], once he has been hired All workers can nd jobs with productivity 1 in locations di erent from their initial location 13 / 54
The model The solution Model solved backward In stage 3, the labor market is either regulated or exible, and the share of individuals with strong family ties is given 14 / 54
Flexible labor market Individuals with weak family ties get a wage equal to 1 because they are perfectly mobile U W F = 1 Individuals with strong family ties: w + (σ) > 0 if immobile 1 (σ) if mobile They get the reservation wage if they are immobile max[0, 1 2 (σ)] 15 / 54
The utility of individuals with strong family ties is U S F = max[ (σ), 1 (σ)] 16 / 54
Rigid labor market The government regulates: minimum wage w job protection R s.t. job not destroyed if y R Deadweight losses associated with job protection: productivity is y c, c > 0, c small, instead of y y uniform distribution on [0, 1] 17 / 54
Individuals with weak family ties get the expected utility U W R = (1 R) max(1 c, w) + R(1 c). The expected utility of individuals with strong family ties is U S R = (1 R) max[w + (σ), 1 c (σ)] + R max[ (σ), 1 c (σ)] 18 / 54
In stage 2, people vote to choose the labor market policy according to the majority rule The share of individuals with strong family ties, chosen in stage one, is given The median voter can have either strong family ties or weak family ties 2 policies: either regulation or exibility 19 / 54
Individuals with weak family ties obtain U W F = 1 under labor market exibility U W R < 1 under labor market regulation Therefore, individuals with weak family ties always prefer labor market exibility Vote! labor market exibility if the share of strong family ties σ < 1/2 20 / 54
Suppose σ > 1/2, Assume that individuals with strong family ties are immobile if the majority of the population has strong family ties when the labor market is exible, i.e.: Assumption 1: (1/2) > 1 2 21 / 54
The expected utility of individuals with strong family ties with exible labor market is U S F = (σ) When the labor market is rigid: U S R = (1 R)w + (σ) Thus, when σ > 1/2, a median voter with strong family ties prefers a rigid labor market rather than a exible labor market 22 / 54
The optimal labor market regulation: max (w,r) US R = (1 R)w + (σ) subject to the zero pro t condition Z 1 R (y c w)dy = 0 23 / 54
Solution R = c and w = 1 c 2 Workers with strong family ties get the expected utility U S R = (1 c)2 2 + (σ) which is larger than (σ), the utility they would get if the labor market was exible In conclusion: the outcome of the vote is regulation if σ > 1/2 exibility otherwise 24 / 54
In stage 1 individuals choose their family values with perfect foresight The payo of individuals with strong family ties is ( max[ (σ), 1 (σ)] if σ 1/2 (σ) + (1 c)2 2 if σ > 1/2 The payo of individuals with weak family ties is 1 if σ 1/2 1 c if σ > 1/2. 25 / 54
Gains associated with strong family ties B Share of population with strong family ties 0 1/2 1 σ A 26 / 54
There exists an equilibrium with weak family ties only if we assume: Assumption 2: when the share of population with strong family ties goes to 0, the utility gains induced by strong family ties are smaller than the maximum wage gains obtained by changing of location: (0) < 1. 27 / 54
Properties of equilibria The equilibrium with strong family ties and rigid labor market has lower employment lower production than the equilibrium with weak family ties Standard" result in economics, BUT 28 / 54
Wefare comparison The equilibrium with strong family ties provides higher welfare than the equilibrium with weak family ties IFF (1) is su ciently large The economy can be coordinated on an equilibrium in which the labor market can be either too rigid or too exible 29 / 54
The model The dynamics of family values Paternalistic parents wish to transmit their own values to their children (Bisin and Verdier, 2001) Each individual lives for one period, and has payo s as before Children inherit family values with probability p and are free to choose their family values with probability 1 p If p > 1/2 and if the initial share of individuals with strong family ties is large! rigid labor market small! exible labor markets 30 / 54
The model yields two main predictions: 1 Individuals with strong family ties prefer more stringent labor market regulation, because they want to stay geographically immobile and they want to be protected from the monopsony power of rms 2 The strength of family ties can persist over time and can have persistent e ects on labor market regulation if family values are transmitted across generations 31 / 54
Family ties and the demand for labor market regulation We document two facts 1 strong family ties predict strong demand for job security and wage regulation 2 positive cross-country correlations between the strength of family ties and labor market rigidity 32 / 54
Family ties and the demand for labor market regulation Data World Values Survey: 4 waves, 1981-2000: family ties, preference for job security, demand for regulation Word Bank: employment protection Aghion, Algan, Cahuc (2008) and ILO: minimum wage 33 / 54
Family ties: (WVS) 1 How important is the family in one person s life (with 1 being very important and 4 not important at all) 2 Do you agree with one of the two statements (taking the values of 1 and 2 respectively): 1) Regardless of what the qualities and faults of one s parents are, one must always love and respect them, 2) One does not have the duty to respect and love parents who have not earned it 3 Do you agree with one of the two statements (taking the values of 1 or 2 respectively): 1) It is the parents duty to do their best for their children even at the expense of their own well-being; 2) Parents have a life of their own Following Alesina and Giuliano (2007), we combine these measures by extracting the rst principal component 34 / 54
Preference for job security (WVS) Here are some more aspects of a job that people say are important. Please look at them and tell me which ones you personally think are important in a job?: Good Job Security? The answers take on the value 1 if job security is mentioned and zero otherwise 35 / 54
Cross-country correlations Preference for job security.2.4.6.8 1 LTU DNK NLD JOR MAR TUR IDN VNM BGD IND VEN DZA NGA HUN SVN UGA EGY HRV IRN ZWE NOR ZAF PHL UKR USA PRI AUT CHL BGR POL CHE PRT BRA CAN FINDEU GRC JPN MEX SVK ESP CHN ROM AUS ARG ITA RUSLUX GBR IRL SWE CZE ISL PER EST BEL FRA BLR LVA 1.5 0.5 Strength of Family ties 36 / 54
Microeconomic evidence Strong family ties Important thing in a job: Job security.021 ***.012 *** (.004) (.002) Government should own the businesses.100 ***.042 * (.029) (.024) Time e ects Yes Yes Yes Yes Country-x Time No Yes No Yes N 63992 58412 Source: WVS - Controls: gender, education, political orientation, religion, income, Robust standard errors clustered at the country level: : ***:1%, **: 5%, *: 10. 37 / 54
Firing costs 0 50 100 150 200 DNK LTU NLD EST BLR FIN DEU CHN GRC MEX PRT TUR ROM ARG IRN IND BRA IDN VNM JOR PHL MAR EGY AUT ESP PER IRL CHL BGD ITA SVN VEN HRV ZAF MKD GBRHUN BGR FRA CAN ZW SWE JPN CZE POL KGZ LVA BELUKR DZA NOR CHE ISL UGA AUS NGA USA PRI 1.5 0.5 Strength of Family ties 38 / 54
Stringency of wage regulation 0.02.04.06.08 LTU DNK NLD EST FIN DEU AUS FRA IND PER DZA MAR ARG CHL UKR SVN POL GRC BGD ROM BGR HUN CZE PRT SVK ESP LVA GBR CAN ITA ZAF BRA AUT CHN JPN BEL MEX USA RUS SWE CHE TUR 1.5 0.5 Strength of Family ties NGA PHL IDNVEN 39 / 54
Dependent variable Firing Cost State regulation of minimum wage Strong family ties.306 **.018 ** (.134) (.007) Observations 60 46 R 2.25.40 Control: Legal origin (Common law, civil law, Scand, German) Source: World Values Survey, Alesina et Guliano (2007), ILO (2007) and Botero et al. (2004) 40 / 54
The persistent e ects of family ties We show that: 1 Second generation U.S. immigrants inherit the family values and the behavior of their country of origin 41 / 54
The persistent e ects of family ties We show that: 1 Second generation U.S. immigrants inherit the family values and the behavior of their country of origin 2 The strength of family ties before WWII is correlated with labor market rigidities at the beginning of the 21st century 41 / 54
The persistent e ects of family ties Intergenerational transmission of family values General Social Survey to study the impact of family values on attitudes of U.S. immigrants towards labor market regulation (since 1977) March Supplement of the Current Population Survey of the U.S. to study labor market outcomes of immigrants. (since 1994) Both surveys provide information on the birth place and the country of origin of the respondent 42 / 54
For both attitudes and labor market outcomes, we run the following OLS or probit (depending on the nature of the left hand side variable) regressions: Y ic = α 0 + α 1 family_ties c + α 2 X i + δ s + ε ic Y ic is our variable of interest for an immigrant i whose forbear was born in country c X i are individual controls family_ties k is the measure of strong family ties calculated from the WVS in the country of origin δ s state or county dummies whenever possible 43 / 54
Mobility Strong family ties in home country -.026 *** (.007) -.019 *** (.006) N 80210 79459 Mobility= 1 if the individual moved from/in a di erent state, or abroad in the last ve years Controls: gender, education, family status, income 44 / 54
Unemployed Strong family ties in home country.014 *** (.005).012 *** (0.005) N 53938 52344 Unemployed is a dummy equal to 1 if the person is unemployed Controls: gender, education, family status, income 45 / 54
Strong family ties in home country Log hourly wage All Unskilled Skilled -.053 *** -.063 ** -.142 ** (.0018) (.024) (.037) N 51192 22208 28984 Unskilled 12 years of schooling Controls: gender, education, family status, income 46 / 54
Important thing in a job: security Strong family ties.486 *** in home country (.093) N 8063 GSS - Controls: gender, age, education, income, political a liation 47 / 54
Government should save job.705 *** (.023) Government should regulate wage.856 *** (.042) Strong family ties in home country N 2583 2583 GSS - Controls: gender, age, education, income, political a liation 48 / 54
The persistent e ects of family ties The persistent e ects of family ties on labor market regulation Family values are transmitted across generations We show now the persistent e ect of family values Countries with stronger family ties before WWII have more rigid labor markets in the beginning of the 21st century 49 / 54
We detect family values before 1940 by looking at the family values inherited from their country of origin by U.S. immigrants whose forebears arrived in the U.S. before 1940 (second, third, fourth generations) Country of origin xed e ects OLS regression for answers to the question about family ties in the GSS 50 / 54
The question is: Do you spend social evening with relatives? 1 almost daily 2 several times a week 3 several times a month 4 once a month 5 several times a year 6 once a year 7 never 51 / 54
Strength of family ties in 1980 2000 1.5 0.5 LTU POLITA ARG CAN IRL PRT FRA HUN GBR BEL CZE RUSJPN CHECHN NOR SWE DEU NLD DNK AUT FIN GRC ESP IND MEX PHL ROM 1.5 1.5 0.5 Strength of Family ties before 1940 52 / 54
Dependent variable Firing Cost State regulation of minimum wage Strength of family ties before 1940.429 ** (.162).018 ** (.007) R 2.25.48 N 27 26 Control: Legal origin (Common law, civil law, Scand, German) Source: GSS, ILO (2007) and Botero et al. (2004) 53 / 54
Conclusion Low employment associated with labor market rigidity could be the price that certain countries choose to pay in order to enjoy the bene ts of family ties We do not know whether labor markets are too rigid or too exible This conclusion illustrates the interest of accounting for cultural values in economics This approach may have many virtues opens our mind of economist? better policy advices?? 54 / 54
Conclusion Low employment associated with labor market rigidity could be the price that certain countries choose to pay in order to enjoy the bene ts of family ties We do not know whether labor markets are too rigid or too exible This conclusion illustrates the interest of accounting for cultural values in economics This approach may have many virtues opens our mind of economist? better policy advices?? 54 / 54