The Economics of Language

The inhabitants of Pormpuraaw, a small Aboriginal community in northern Australia, do not have such concepts as ‘right’, ‘left’, ‘forward’, or ‘backward’, they use cardinal direction terms instead. For instance, they say, ‘There's an ant on your southeast leg’ or ‘Move the cup to the northwest a little bit’. Thanks to their language, members of this community seem to have internal compasses. Otherwise, they would not even be able to greet each other: the normal greeting in their language is ‘Where are you going?’ and the answer should be something like ‘south-southeast’. As a result, speakers of languages with absolute frames of reference (like the inhabitants of Pormpuraaw) are much better at staying oriented, even in unfamiliar landscapes or inside unfamiliar buildings, than those who speak languages with relative frames of reference (like English or Russian), and are capable of outstanding nautical achievements, says Lera Boroditsky, a researcher from Stanford University studying how language influences thinking.

Speakers of Bassa, a language of Liberia, distinguish just two colours, dark and light, because the language has only two terms for classifying colours. Children born to Hebrew-speaking families attain gender identity about one year earlier than their Finnish-speaking peers: in Hebrew, not only nouns but also verbs have feminine and masculine forms, while Finnish has no gender at all. The languages we speak shape the way we think, the way we see the world, and the way we live our lives, concludes Dr Boroditsky.

Language affects the economy as well: its influence is studied by the economics of language, a relatively new interdisciplinary field that is located at the intersection of economics, psychology, sociolinguistics, and cognitive neurobiology. In the middle of the 20th century, an American linguist, Joseph Greenberg, suggested studying linguistic diversity in order to understand how it is connected to political, economic, geographical, historical, and other non-linguistic factors. American economist Jacob Marshak, one of the ‘fathers of econometrics’ (who also spoke ten languages), was the first to define and apply the economic approach to linguistic analysis, arguing that language has economic characteristics: value, utility, costs, and benefits.

Financial benefits of foreign languages

‘We are all born into (usually) one language, which we treasure, but we also have economic and cultural incentives to learn other languages to survive in a globalised world,’ write Shlomo Weber, President of the New Economic School, and Victor Ginsburgh, Professor at the Université libre de Bruxelles, in their review of studies on the economics of language.

Language skills form human capital: those who speak foreign languages earn more than those who speak only their native language. The scale of the ‘language premium’ in personal incomes depends on the country, the language itself (how widespread or popular it is), the level of proficiency, and occupation. For example, in Vietnam, this premium reaches 40-60%, while in the USA, the country of the world's dominant language, those who speak foreign languages earn only 2% more on average. The ‘English premium’ in Austria, where almost half of the population speaks English, is 11%, while in Spain, where English is not very common, it reaches 39%, note Ksenia Rozhkova and Sergey Roshchin, experts from the Higher School of Economics. Their research shows that, in the Russian labour market, those who speak foreign languages earn 11% more on average, and for fluent speakers of foreign languages, the premium increases to 27%. Among occupational groups, senior and middle managers receive the highest premium (22%), while, for workers, it is almost non-existent. Good foreign language skills not only increase income but also reduce the risk of unemployment. Those migrants who speak the language of their country of residence earn 5-35% more than those who do not (according to a study across seven developed countries).

Thinking in a foreign language also helps economic decision-making, reveal researchers from the University of Chicago. Thinking through a problem in a non-native language, people make more rational decisions because the foreign language provides a distancing mechanism that moves people from the immediate intuitive system to a more deliberate mode of thinking.

Verbs and savings rate

The way future events are grammatically marked in a language influences people's inclination to save, argues economist Keith Chen.

Languages are divided into weak-FTR (future time reference) and strong-FTR languages, depending on whether they require the future to be grammatically marked in a different way than the present. Weak-FTR languages include, for example, German and Chinese, where the same verb form can be used to describe both present and future, the second group includes English and Spanish.

Speakers of ‘futureless’ languages save 31% more per year, on average, and accumulate 39% more by retirement. Grammatically separating the future from the present makes the future feel more distant, thus, we are less motivated to save for future financial comfort, Chen explains. Moreover, speakers of futureless languages pay more attention to their health: they are 24% less likely to smoke, 29% more likely to exercise, and 31% less likely to be obese.

Verb forms have a macroeconomic effect as well. Countries that speak weak-FTR languages save, on average, 6% more of their GDP per year than those that use different verb forms to describe future events.

Language macro effects

From ancient times, trade has been the main economic incentive for language learning. In the modern world, the closer the languages of two countries are, the bigger their bilateral trade turnover, and, on average, a common language (native or official) increases trade flows by almost 50%.

In turn, increased trade increases the number of people willing to learn the language of the trade partner, reveal Weber and Ginsburgh: on average, there is a 13% probability that a doubling of trade will result in more learning of the destination language. Growth in Chinese/English trade should conceivably promote the learning of Chinese in native English countries, as well as the learning of English in China, but it is difficult to predict which language will win the battle, write Weber and Ginsburgh. The higher birth rates in Arabic- and Spanish-speaking populations will prompt more people to learn the two languages, while the Arabic- and Spanish-speaking populations will learn fewer foreign languages, they add. Forecasts based on 20 parameters indicate that in 2050, English will still prevail.

Linguistic distance (how similar one language is to another) affects the spread of technology and innovations. For example, in Europe, once a patent is granted by the European Patent Organisation, the patent must be validated in each country where protection is wanted; this requires translation, which can be very expensive. The bigger the linguistic difference is, the lower the probability of patent validation: a 1% increase in the linguistic distance reduces the probability of validation by almost 16%.

Ethnolinguistic diversity can reduce institutional efficiency and political stability, as well as increase the level of corruption, owing to the lobbying activities of multiple groups, argued Paolo Mauro, Deputy Director in the IMF's Fiscal Affairs Department. Corruption lowers investment, which, in turn, slows down economic growth. One example of this is ‘Africa’s growth tragedy’, which was studied by economists William Easterly and Ross Levine. They compared Asian countries, with about 2,300 living languages, with African countries, where there are about 2,100 languages, but the linguistic diversity in African countries is much higher: in most of them, about 90% of the population do not speak the official languages at home. The study found that high ethnolinguistic diversity correlates with a lack of education, weak financial systems, and inefficient infrastructure. Of the 15 most ethnically diverse countries, 14 are located in Africa, whereas the two fastest-growing East Asian economies, Japan and Hong Kong, are among the most ethnically homogeneous.

However, there also are positive examples of linguistic diversity. For instance, the rapid development and prosperity of Silicon Valley in the late 1990s is often attributed to the background of the foreign scientists, engineers, and entrepreneurs who flocked to California from India, China, Taiwan, and Israel: cultural and linguistic diversity contributes to the success of business teams. Metropolitan regions with a higher degree of diversity in terms of education, cultural background, sexual orientation, and country of origin correlate positively with a higher level of economic development.

Common language

According to a study by economists from the University of California and the Helsinki School of Economics, the language in which companies publish their reports affects investor decisions. Investors prefer firms that literally share a common language with them.

The researchers used data on the daily trades in Finland, where the official languages are Finnish and Swedish (Swedish is spoken by about 7% of the population, and 93% speak Finnish). They also defined the culture of the firm according to the name of its CEO. It turned out that Swedish speakers invest more in firms that publish their annual reports in Swedish and were associated with Swedish culture, while Finnish-speaking investors rather opt for firms that share their language and culture. Companies communicating in Swedish turned out to be about 15 times more popular among Swedish-speaking investors than firms communicating in Finnish, and the other way round. Two Finnish companies in the sample published reports exclusively in Swedish, and both had an overwhelming majority of Swedish-speaking investors.A similar correlation between investor behaviour and language differences was found in Belgium, where the two main languages are French and Dutch. French-speaking investors are more likely to buy French stocks and shares of companies from countries where French is a common language. Dutch speakers prefer to invest in Netherlands-related assets.