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In a recent Carpe Diem blog post, my colleague Mark Perry highlights several articles that take the position that “government-coerced paid leave” is a bad idea. For instance, Veronique de Rugy worries about the consequences for workers, especially women, if we have a federal paid leave policy. She worries that by adopting the policies of other OECD economies, we will get a bigger gender pay gap, and hurt the chances for women to rise to leadership positions. Donald Bodreaux in an “Open Letter to Aparna Mathur” argues that there is no reason to suspect that paid leave is under-provided, and that efficient labor markets guarantee an optimal level of paid leave. Others, like Dan Mitchell, argue that paid leave is problematic because it would grow the size of government, and that federal paid leave is anti-market. So is there an economic case for paid parental leave? As I have argued several times, and as our AEI-Brookings Working group reports from 2017 and 2018 highlight, there most certainly is.
Is there a market failure?
To me, the case is quite simple. Let’s look at the issue of whether there is a market failure in the provision of paid leave. The easiest way to think about this is that there is a positive externality to allowing women to stay attached to the workforce while also allowing them to take time off to meet family needs. The externality arises because when women stay engaged, this contributes to them being more productive, having higher earnings, contributing to tax revenues and economic growth, and relying less on the social safety net. There is also the larger benefit to children and maternal health, and family bonding, which can yield longer term benefits to society as a whole. Such externalities may not be internalized by the private employer making the most cost-effective decision for their business, or by employees who may either quit or return to work too early relative to the needs of their children or their own health. But this can lead to costs in the long-run that are borne by the society as a whole. In addition, parents may not be able to make the most optimal decisions about how much time to take off or how much to work because they face financial or other constraints, and this can lead to a sub-optimal provision of labor, especially by women, and lead to adverse consequences for the well-being of the parents and the children. Finally, even when businesses want to offer paid leave, they may be unable to do so because it’s costly. This is particularly true for small and medium sized businesses. So a federal program that minimizes costs on employees or employers makes sense. This could explain the support for state-level policies on paid leave amongst small and medium sized businesses, as found by Bartel et al. in their 2017 paper “Employer Attitudes to Paid Family Leave.”
Are there societal benefits to paid leave provision?
Increasing the labor force participation rate and the number of hours worked is essential to growth in GDP. Olivier Thévenon et al. show that a convergence of male and female labor force participation rates would increase GDP by an average of 12% across OECD countries. Specific to the US, research illustrates that 28% of the decline in the American female labor force participation rate relative to other OECD countries is due to the lack of family-friendly workplace policies. And research shows that labor force participation rates are highest for women who receive paid leave (82%), as compared to those who quit their jobs during pregnancy (64%). By the numbers, the economic argument is simple. Paid family leave is a way to provide economic security and equity to working families, boost the economy and remain competitive against other OECD countries.
Will it lead to adverse outcomes for women?
A second concern is whether having such policies will lead to adverse outcomes for women and affect their ability to move up the career ladder. This is certainly a concern since employers may discriminate against women in hiring or salaries, as women in their prime childbearing years are likely to take up the leave. However, as research shows, such concerns arise with leave durations that last longer than a year. As Veronique de Rudy cites, Denmark offers 52 weeks of paid leave and this hurt career outcomes for women. I am completely in agreement that for women who take such long leaves, there will clearly be adverse outcomes. But other research shows that for leaves shorter than six months, paid leave is shown to encourage women to stay engaged in the labor force, and to enable them to rise up the career ladder. In fact, if we look at US states, where leave policies have typically been between 4-6 weeks, the effects for women have been positive. Research analyzing the California and New Jersey programs show these programs keep women attached to the labor force in the months surrounding childbirth. In California, the average weekly hours worked of women with a child between the ages of one and three increased by 6 to 9 hours after the implementation of the state program. Separately, it was found that women who have access to paid leave are 40% more likely to return to work than women who do not have access to a paid leave plan. Also, paid leave has particularly benefited disadvantaged communities. So, to the extent that we care about allowing people to stay engaged in the labor force before and after having a child, paid leave policies can play a role. Of course, recent evidence also shows that employers may respond to such policies by increasing skills requirements for workers, which could have consequences for less-educated women that we need to be careful about.
This is also one reason why designing the appropriate policy, both in terms of duration and benefit generosity, matters. The AEI-Brookings group recommends eight weeks and the Democratic FAMILY Act suggests 12 weeks. Republican proposals have also been within this range. There should be no concern that a federal paid leave proposal in the US would approach a duration of six months or more.
Are we forcing women to choose work over family?
Some social conservatives worry that having access to these policies would implicitly encourage women to choose work over family, at a time when only 17% of women with children under the age of 3 would voluntarily choose to work full-time. This argument is confusing at many levels. One, having access to paid leave allows women to take time off from work when they need it, and return to work when they feel comfortable doing so. It does not force women to choose work over family. Women are free to quit working if that’s what they want to do. However, a lack of paid leave leads to fewer choices for women, since they either rush back to work before they would want to, or are forced to quit. Neither of these is a satisfactory outcome. Why not expand choices for women, rather than restricting them? Second, it is unclear that when women say they would rather work part-time, whether that choice reflects the fact that they understand they are going to be doing the majority of balancing work and family needs. Finally, paid leave access has been shown to increase the probability of having a first and second child, as well as having children earlier than women without any access to paid leave. In either case, allowing families the flexibility to decide how and whether to use the policy is a better outcome than not having the policy at all.
Can mandated paid leave policies potentially hurt the workers we hope to help?
A concern raised by nearly all commenters is whether mandated paid leave can hurt workers, and do we need the government to interfere in these policies? Absolutely. That is a large reason why the AEI-Brookings working group has spent the previous two years studying the pros and cons of paid leave programs, in order to focus on the policy’s design. There are two things worth highlighting here. One, a mandate to provide 12 weeks of unpaid leave has existed on businesses since the passage of the 1993 Family and Medical Leave Act. That is not under debate today. Since 1993, businesses have known that they have to allow workers to take time off for parental, medical or family care needs. The question is, can making some part of the FMLA paid, lead to worse outcomes for workers? It is certainly possible if the new policy encourages much higher leave taking and for longer durations, but there are ways to offset some of these possibilities. Make the policy gender neutral and encourage men to take leave as well, so that employers have less of an incentive to discriminate against female workers. Also, don’t impose the costs on employers. If the employers don’t face a financial cost for providing paid leave, they may have less incentive to take it out of worker wages or restrict hiring. This can be done through social insurance (via an employee payroll tax) or as recent Republican bills propose, pulling money out of social security. Again, the question comes down to the design of the policy. And finally, keep the length of the leave moderate, so that the costs to the employer of substituting for the employee on leave, are not too high. Many of the studies we see quoted that show adverse impacts for women tend to be from countries that have extremely generous paid leave policies, extending over six months to a year. Those kinds of leaves are not under consideration at all in the US. Even the Democratic proposal for paid leave, the Family Act, only extends to 12 weeks.
Is the market working in an optimal fashion so that everybody who needs paid leave is able to get it?
Absolutely not. There are significant disparities in access. While the market may be working well for middle to high income workers who often do have some type of paid leave through their employer, it’s the lowest wage workers who are the most vulnerable who have the least access to paid leave. In many cases, these workers do not even have access to unpaid leave as part of the FMLA because they work in small firms or do not have enough tenure with their current employer, to qualify for FMLA unpaid leave. This means that if they do need to take time off when having a child, they do not have job protection. So even if they are eligible for the state paid leave program, they are not comfortable taking it up, because they worry about losing their job if they take too many days off.
Dan Boudreaux questions whether “competent economists” should support my efforts to promote more paid leave. I hope that my responses have made the case to him and other economists who are on the fence on this issue. As an economist, I view the lack of paid leave as problematic because it restricts people’s ability to fully participate in the labor market to the extent that they desire or that is optimal for their families and employers. It is a problem when people, particularly women, have to make constrained choices about whether to keep their job or to quit it, because the lack of paid time off from their job does not allow them to balance work needs against family needs. If women have to quit their jobs because they have a child, this has negative implications for the economic security of families, since women often contribute substantially to household incomes, but also has implications for the society as whole.
It is right to worry about how a new government program to provide paid leave may play out. I share the concern that a government mandated program that is overly generous in length of leave and wage replacement rates, can lead to adverse outcomes. We need to be careful about how we design the policy. But it is also fair to accept that the market is failing many workers in this regard. While some may view that as a rational, optimal outcome, I certainly do not. We need to be creatively thinking about these policies so that they benefit workers at minimal costs to employers. But a failure to acknowledge the problem is not acceptable.
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