The Role of Family Ties in the Labour Market. An Interpretation Based on Efficiency Wage Theory

ABSTRACT

By casual empiricism, it seems that many firms take explicit account of the family ties connecting workers, often hiring individuals belonging to the same family or passing jobs on from parents to their children. This paper makes an attempt to explain this behaviour by introducing the assumption of altruism within the family and supposing that agents maximize a family utility function rather than an individual one. This hypothesis has been almost ignored in the analysis of the relationship between employers and employees. The implications of this assumption in the efficiency wage models are explored: by employing members of the same family, firms can use a (credible) harsher threat — involving a sanction for all the family's members in case of one member's shirking — that allows them to pay a lower efficiency wage. On the other hand, workers who accept this agreement exchange a reduction in wage with an increase in their probability of being employed: this can be optimal in a situation of high unemployment. Moreover, the link between parents and children allows the firm to follow a strategy that solves the problem of an individual's finite time horizon by its making use of the family's reputation.