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October 15, 2018

Working in family firms

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Family firms are able to offer greater job security to their workers, but pay them lower wages than non-family firms do. Research also shows that firms owned and managed to a large extent by a family or a single individual are less likely to use management practices that are usually associated with better firm performance. For example, they are less likely to monitor performance, to set targets and provide incentives, to retain talented workers while dismissing poor performers, or to use lean management techniques such as just-in-time production. 

This quick portrait shows that family and non-family firms provide their workers with different compensation schemes and manage them differently, clearly implying that working in the two types of firms is not equivalent. This can be largely explained by the objectives pursued by family firms, their time horizon, and their governance structure. Family firms tend to have longer time horizons than their non-family counterparts, leading them to take less risk, and allowing them to guarantee to their workers greater employment stability in the long term. Founders of family firms are often willing to bequeath the firm to their heirs, who sometimes derive more satisfaction from managing the firm themselves and perpetuating the firm’s traditional organization than from maximizing the firm’s financial performance. 

That family firms represent a particular form of capitalism with strong consequences for workers calls for caution when discussing policy toward these firms. For example, many European countries exempt family business assets from inheritance and wealth tax bases, even though such assets are disproportionately held by wealthy households. To investigate if such tax policies could be economically justified, researchers have focused on performance differences between family and non-family firms, especially when family firms are transmitted across generations. Existing studies tend to find that family firms owned and managed by descendants of their founders perform equally or worse than their non-family counterparts, showing that tax exemption cannot be justified by any better economic performance of family firms that are inherited. However, the transmission of management across generations is likely to be one of the key features allowing family firms to commit credibly to long-term arrangements with their workers and to guarantee that they will not be fired after any future change in management. Hence, limiting the scope for the transmission of family firms across generations may also have unexpected beneficial consequences for the workforce.

Interesting recent studies have also shown that family firms are more numerous in countries or sectors with more hostile labor relations, and that they offer even more job security in countries where public unemployment insurance is more limited, or where it is easier to dismiss workers. This suggests that family capitalism is more developed and successful in contexts or countries when it can be relatively more beneficial to workers or to employment relations than elsewhere. Another consequence is that the success of policies toward family firms depends on a country’s labor market conditions and regulations. As such, policies will also affect the concentration of private property across generations, they may also need to be coupled with other policies that reduce intergenerational inequality. 

© Thomas Breda

Read Thomas Breda’s full article, “Working in family firms”

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