Academic journal article Economic Inquiry

Reform Support in Times of Crisis: The Role of Family Ties

Academic journal article Economic Inquiry

Reform Support in Times of Crisis: The Role of Family Ties

Article excerpt

I. INTRODUCTION

The Great Recession and the subsequent sovereign debt crisis have triggered the most severe economic downturn in several southern European countries since World War II. Unemployment, especially among the young, reached extremely high levels in the "crisis countries". (1) While southern European labor markets are traditionally characterized by high youth unemployment rates, the Spanish rate of 56% in 2013 was nevertheless unprecedented. The data for Italy and Portugal are staggering too, reaching rates around 40%. These statistics illustrate severe structural problems which had been attenuated during the boom of the early 2000s. Despite revealing these problems, the crisis has not led to substantial liberalizing reforms in these countries. The Heritage Foundation's Index of Economic Freedom shows a stagnation in "labor freedom" in the crisis countries during the period 2007-2014. (2)

This lack of reform is puzzling as a sizable body of research in political economics argues that crises should facilitate economic reform. The alleged inverse relation between the state of an economy and a society's willingness to reform has been coined the "crisis hypothesis" (see, among others, Drazen and Easterly 2001). Rodrik (1996) even claims a tautological relation between crisis and reform: "[T]hat policy reform should follow crisis [... ] is no more surprising than smoke following fire." The limited reform effort in the crisis countries is at odds with the prediction of the crisis hypothesis. To paraphrase Rodrik (1996), there is fire, but where is the smoke?

In this study, we describe a mechanism that rationalizes this lack of comprehensive reform. We argue that an important determinant of a society's willingness to reform has been neglected in the literature: family ties, specifically altruistic links between parents and their working-age children. These links are particularly strong in southern Europe, a fact that has long been highlighted in sociological research (see, e.g., Reher 1998) and is confirmed by the results of the World Values Survey (see, e.g., Alesina and Giuliano 2011). In a political economy model, we show that family ties and the resulting intrafamily transfers can affect voting behavior in a way that makes resistance to reform particularly strong in times of crisis.

To provide a concrete illustration of the mechanism that relates intrafamily altruism and voting behavior, we consider a labor market reform within an insider-outsider framework. We think of reforms as measures that cut back employment protection, for instance, a reduction of severance pay requirements. On the one hand, such reforms lead to lower wages and/or higher risk of job loss for established insiders. On the other hand, reform incentivizes firms to hire workers, thereby increasing overall employment. The strong distinction between one insider and one outsider group is for illustration purposes only. In line with the literature (Bentolila, Dolado, and Jimeno 2012; Lindbeck and Snower 2002), we think of outsiders as those who do not have access to protected jobs with above-equilibrium wages. This group includes the unemployed, the underemployed, the fully employed on temporary contracts as well as low-wage earners.

As a first step, we develop a benchmark scenario without altruism: the individualistic case. In this scenario, all outsiders are in favor of reform whereas all insiders oppose it and thus the rationale of the crisis hypothesis applies: if the economic situation deteriorates, the share of outsiders rises and so does support for reform. Next, we extend the model by introducing intrafamily altruism. We first assume that agents value their family members' well-being as strongly as their own: the completely altruistic case. In this scenario, it can occur that outsiders who would prefer reform in the absence of altruism now vote against it as they take into account the effect of reform on their family members. …

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