Culture , policies and labor market outcomes

Culture, Policies and Labor Market Outcomes We study whether cultural attitudes towards gender, the young, and leisure are significant determinants of the evolution over time of the employment rates of women and of the young, and of hours worked in OECD countries. Beyond controlling for a larger menu of policies, institutions and structural characteristics of the economy than has been done so far, our analysis improves upon existing studies of the role of “culture” for labor market outcomes by dealing explicitly with the endogeneity of attitudes, policies and institutions, and by allowing for the persistent nature of labor market outcomes. When we do all this we find that culture still matters for women employment rates and for hours worked. However, policies and other institutional or structural characteristics are also important. Attitudes towards youth independence, however, do not appear to be important in explaining the employment rate of the young. In the case of women employment rates, the policy variable that is significant along with attitudes, is the OECD index of employment protection legislation. For hours worked the policy variables that play a role, along with attitudes, are the tax wedge and unemployment benefits. The quantitative impact of these policy variables is such that changes in policies have at least the potential to undo the effect of variations in cultural traits on labor market outcomes. JEL Classification: J16, J22, J23, Z1 Keywords: culture, policies, institutions, employment, hours Corresponding author: Fabio Schiantarelli Department of Economics Boston College Chestnut Hill, MA 02467 USA E-mail: schianta@bc.edu * We thank Paola Giuliano for very helpful discussions on the issues at stake and on the data, Luigi Guiso, Daron Acemoglu and participants in the MIT macro lunch for very useful comments and suggestions. 1 Introduction and motivation A number of labor market outcomes the employment rate of women and of the young, the yearly hours worked by those who have a job di¤er substantially across the OECD. In the period 19992002, for instance, the employment rate of those in the age bracket 16 to 25 was on average 41 per cent in Mediterranean countries, 43 percent in Continental Europe, and 58 per cent in AngloSaxon countries. In the same years the employment rate of women was 59 percent in Mediterranean countries and 80 percent in Nordic countries. These variables have also evolved di¤erently within each group of countries over time: for instance, between the early 1980s and the beginning of this decade the employment rate of women has remained virtually constant in the Nordic countries, while it has increased by almost 20 percentage points in Continental Europe and in the AngloSaxon countries, and by 6 points in Japan. Average hours of work tend to decrease in the 80s, although at a di¤erent pace in each group of countries. In the 90s the rate of decrease tends to be smaller in Continental countries, and near to zero in Mediterranean and Nordic countries. It has been claimed that attitudes towards gender and the young, what is sometimes referred to as a countrys "culture", are important determinants of the cross-country and time series di¤erences in the employment rates of various demographic groups. (see for instance Algan and Cahuc (2007) and Fortin (2005)). In related work, Alesina, Glaeser and Sacerdote (2005) have asked whether culture could explain the observed di¤erence in hours worked between Europe and the United States, and Fortin (2008) has studied the e¤ect of culture on an individuals decision to join the labor market in the United States. However, the evidence on the role of "culture" on a countrys labor market outcomes has so far been inconclusive, mainly for three reasons. First, as noted by Alesina, Glaeser and Sacerdote (2005), these papers often fail to allow for other factors that may determine labor market outcomes, in particular the di¤erences across countries and the evolution within a country of economic structure (for instance the share of the services sector) and of labor market policies and institutions. Second, these analyses rarely recognize that the variables used to capture a countrys "culture" are typically endogenous: attitudes towards leisure and work, for instance, are likely to be a¤ected by a persons own labor market experience and by the experience of those around her. Finally, these papers seldom allow for the fact that employment rates and hours of work evolve gradually over time. Our aim is to investigate whether culture plays a statistically and economically signi cant role when one tries to take care of the endogeneity of workersattitudes, to allow for the persistent nature of labor market outcomes, and to control for a large menu of policies and institutions, recognizing as is the case of attitudes that some of these variables are also likely to be endogenous. The investigation of the e¤ects of workersattitudes on labor market outcomes is part of a more general research program aimed at assessing the e¤ect of culture on economic phenomena. The endogeneity of cultural traits is one of the central issues in this literature and various authors have tackled it di¤erent ways. Alesina and Giuliano (2007) use a variable based on the grammatical rule of pronoun drop as an instrument for a particular cultural trait: family ties. Guiso, Sapienza and