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A public policy blog from AEI
This is part of a series that poses five important questions illuminating any would-be president or new administration's stance on key issues
This post was originally published February 10, 2016, and has been updated to reflect current events.
Work is the backbone of the economy, but the structure and strength of the labor force depend on another pillar of American society: the family.
The labor force participation rate of women in America has grown tremendously over the last several decades, but it has stalled relative to the OECD in recent years. Research by economists Francine Blau and Lawrence Kahn suggests that the lack of family-friendly policies, such as paid family leave, may be responsible for this trend. The US needs to have a system of paid family leave (maternal and paternal) at the time of birth of a child.
Currently, the Family and Medical Leave Act (FMLA) in the US mandates that employers provide 12 weeks of job-protected leave to employees at the time of birth of a child. However, FMLA leave is unpaid; only about 12% of workers have access to paid family leave. Three states — California, Rhode Island and New Jersey — offer some type of paid leave, and a few employers in other states offer paid leave as well.
Research suggests that these kinds of programs are successful at keeping women in the labor force post-birth and at preserving their job-specific human capital. Moreover, they are important for the health of the child and the mother. In the absence of such programs, women either drop out of the workforce to care for the child, or must return to work earlier than their health or their child’s health would dictate. This issue gains even more salience with the rise in childcare costs, which often force families to choose whether to continue working and pay for childcare, or to stay at home and look after the child if job earnings are not high enough to cover childcare.
2. What do we know about mothers’ labor force participation, and why does it matter?
Many more mothers choose to participate in the labor force today than in the 1970s. Data from the Bureau of Labor Statistics (BLS) show that for mothers with children under the age of 6, participation rates rose from 39% in 1975 to 64% in 2015, and mothers with older kids have participation rates at 74% today. Further, single mothers participate at higher rates than married mothers. In 2015, the participation rate was 75% for single mothers, compared to 68% for married mothers.
Participation in the labor market is a key predictor of economic outcomes. According to Census data, within the pool of married mothers, about 65% of mothers in families with less than $40,000 in family income are not in the labor force. For families with over $100,000 in family income, approximately 20% of married mothers are not in the labor force. So why are more low-income mothers not working? According to Pew survey data, reasons for non-participation may be different for higher income mothers as opposed to lower income mothers. Single, low-income, mothers were more likely to stay at home for lack of finding a job, or due to illness or a disability. Married mothers with working husbands were more likely to choose to stay at home to care for the kids.
What about preferences? Among all mothers, there are big differences across income groups. Among those who “don’t even have enough to meet basic expenses”, about 47% of working mothers said their ideal situation would be to work full-time. By contrast, only 31% of those comfortably well-off said they would prefer full-time work. Only 23% of married mothers wanted full-time work compared to 49% of unmarried mothers. Again, the message is that income, which is typically higher for married parent families, matters for the choice of whether to work and how much to work.
California was the first state to enact a paid family leave program in 2004. This is funded through a payroll tax of approximately 0.9% and allows for a reimbursement rate of approximately 55% of the base weekly wage for up to six weeks. While the claims on the program have been steadily increasing over time, a 2014 study by the Center for Poverty Research (CEPR) using administrative data from the California Employment Development Department finds that the take-up rate is only about 25-40% for eligible mothers. In 2014, total claims were 227,830, suggesting that less than 2% of the California workforce used this program. These take-up rates are very low compared to those found by other studies for programs like the Earned Income Tax Credit (82%) and Unemployment Insurance (72%).
One possible reason for this is that while all employees are eligible for the paid family leave program, only employees who are also eligible for FMLA are guaranteed job protection. In other words, while paid leave is available, it doesn’t necessarily come with job security. As a result, some eligible workers do not take advantage of the paid leave because they are afraid of losing their jobs. FMLA eligibility requires that employees be at firms with more than 50 employees and have put in at least 1,250 hours in a year. This implies that typically a low-wage worker working few hours or at a small firm is ineligible for FMLA.
Another reason for low participation was that the 55% replacement rate was often insufficient to help low-income families take the full period of offered leave. Moreover, in many cases, the actual wage replacement was lower than that. As per a study by Eileen Applebaum and Ruth Milkman, of all the workers who took paid family leave, 11% received less than half their usual pay. Another 39% received half their pay. About 42% received more than half, and only 8% received full pay. This also explains why mothers often did not take the full duration of the leave. Studies show that mothers typically take up 50% of the full leave available perhaps because they cannot afford to exhaust the benefits.
These problems also show up in New Jersey and Rhode Island. Therefore, addressing these issues is critical to the success of any federal paid family leave program.
4. In what ways can we pay for paid family leave?
The US needs a federal paid leave policy that allows mothers to take time off around childbirth without the risk of losing their jobs (and subsequently their income) at the time when they are experiencing an increase in childcare costs. Several different ideas have been proposed over the course of this election cycle. Some of these include the provision of tax credits to employers to offer paid family leave, allowing tax-advantaged savings accounts, reforming unemployment insurance, increasing payroll taxes and providing benefits through the EITC. As I have written earlier for Tax Notes, another possibility is to allow employees to access money, in advance, that would ordinarily be available to them at the end of the taxable year through our current system of tax credits, notably the Earned Income Tax Credit, the Child Tax Credit and the Child and Dependent Care Tax Credit. Combined, this could allow low-income families to receive upwards of $7,000 at the time of childbirth that would help pay for some of the costs of childcare and unpaid leave. The cash amounts would be even larger if the Dependent Care Credit were expanded and made fully refundable so that low-income households could actually benefit from the availability of this credit. The caps on creditable expenses for this are not adjusted for inflation and have not been increased to account for the soaring costs of childcare. At the same time, expanding the EITC would help put more money in the hands of these low-income families.
The campaign proposals have focused on funding paid leave through reducing waste and abuse in the unemployment insurance system (under the Trump plan) and funding it through higher taxes on the wealthy (Clinton plan). As I have written earlier, there are several problems with these proposals. First, relying on funding these programs long-term through either of these approaches is unrealistic since it is unlikely that the Department of Labor could ever completely reduce waste and abuse to zero dollars. Also, pushing through tax increases in Congress is an increasingly tough prospect with Republican opposition to tax hikes. Moreover, the eligibility rules vary across the two plans. Under the Trump plan, only mothers would be eligible, which would lead to employer discrimination and reinforce the stereotype that mothers should be the primary caregivers. Under the Clinton plan, it seems likely that only those eligible for FMLA would benefit from job protection, leaving 44% of low income workers without job protection and possibly uncovered by the policy. Again, design issues matter and though it is encouraging to see both candidates talk about this issue, a note of caution is warranted here.
5. Is there momentum building up for paid family leave in the US?
While the federal government has been slow to respond to this issue, many employers and some states are coming up with their own plans. (I spoke on this topic on NPR’s All Things Considered in their series on working parents, titled #NPRStretched). Recently, the state of New York has passed legislation that will fully phase-in by 2021 and will provide paid leave in combination with job protection to eligible employees. The state of California has increased its wage replacement rate to 70% from 55%. DC is figuring out its policy and is set to pass legislation later this year. Employers such as Netflix, Twitter, Google, and Amazon have come up with their own policies.
While the momentum has been building, this is leading to a patchwork of policies across states and employers. There is little uniformity in terms of coverage and it is very likely that low income workers will continue to lack access to these policies. It’s time to figure out how such a policy can be implemented at the federal level in such a manner that it improves working conditions for millions of families across America, is not tremendously costly or burdensome for employers, and encourages women and men to retain their attachment to the workforce, in order to provide a better life for their children and their families.
The original text, published February 10, 2016.
As presidential candidates try to win voters and formulate platforms that will raise labor force participation, they must weigh the challenges the economy poses to the family, and then come up with viable solutions.
With that in mind, here are five questions for the candidates to ponder as the election season proceeds.
Why is it important to provide paid maternity leave (and family leave) in the United States?
The labor force participation rate of women in America has grown tremendously over the last several decades. In order to sustain this rise, the US needs to have a system of paid family leave (maternal and paternal) at the time of birth of a child. Currently, the Family Medical Leave Act in the US mandates that employers provide 12 weeks of job-protected leave to employees at the time of birth of a child. However, very few employers pay for this time of leave-taking. Only three states — California, Rhode Island and New Jersey — offer some type of paid leave, while a few employers in other states offer paid leave as well.
Research suggests that these kinds of programs are successful at keeping women in the labor force post-birth and at preserving their job-specific human capital. In the absence of such programs, women either drop out of the workforce altogether to care for the child, or are forced to return to work earlier than their health or the health of their child would dictate. This issue gains even more salience with the rise in childcare costs, which often force families to choose whether to continue working and pay for childcare, or to stay at home and look after the child if job earnings are not high enough to cover childcare.
The lack of paid leave makes the US an outlier amongst the developed countries. According to a recent report from the Organization for Economic Cooperation and Development, on average across OECD countries, mothers are entitled to 17 weeks of paid maternity leave around childbirth. Moreover, maternity benefits typically average around 78% of average gross earnings, and 12 countries offer full compensation at the time of leave. The United States is the only country that has no federal policy to offer statutory paid leave.
What is happening to childcare costs in the United States?
Keeping children in childcare is costly for American families, particularly for low-income families. According to a survey by Pew Research, costs of childcare could average 7% of income for high-income families and 40% of income for low-income families. Perhaps, as a result, American families use more informal sources of care than the average OECD country. American children under 2 years spend about 25 hours per week in informal care, compared to the EU-average of 3.5 hours and children aged 3-5 years spend 23 hours compared to the EU average of 3.2 hours in informal care. The US Census Bureau data also show that in 2011, 49% of children aged 0-4 with working mothers were primarily cared for by a relative, while 24% were in formal childcare centers.
The problem with this is that often the quality of informal care is suspect. Some studies find that informal care has significant negative effects on test scores relative to center-based care, and that families are more likely choosing informal care because of how costly formal care is, rather than because they perceive any particular cognitive benefits from it. Finally, what is even more troubling is that even the average quality of formal care centers is mediocre as compared to other developed countries.
Why do early investments in children matter?
The reason we care about policies such as the provision of paid family leave and ways to offset costs of childcare is because these policies affect labor force participation rates, particularly for women. They also have an impact on household incomes and household investments in children’s education. Gaps in education between children born into high income households and children born into low income households often emerge as early as kindergarten and often persist. Susan Dynarski finds that a child born into a poor family has only a 9% chance of getting a college degree, while for a child in a high income household, the odds are 54%. Since a college degree affects lifetime earnings, the lack of a degree often leads to the persistence of poverty across generations. Often, these income gaps are driven by differences in family structure.
A 2014 report from the USDA shows that a typical married parent family spends 50% more on child-related expenditures compared to a single parent family. Single mothers are typically less educated and poor. As a result, children growing up in these families are disadvantaged when it comes to readiness for school. Also, the fact that single mothers are more likely to work non-standard schedules implies that they are able to provide less parental input than married mothers.
How are single mothers disadvantaged in the United States?
While the overall unemployment rate for the country is now lower than 5%, data from the Bureau of Labor Statistics show that the unemployment rate for single mothers with young children is currently at 7.8%. Over the last ten years, the earnings of single mothers have declined by 6%. As a result, data from the Census Bureau shows that, in 2014, married couple families with one or more children under 18 years earned an average income of $111,278 while single mothers earned $36,780.
These data make amply clear the peculiar challenges faced by single mothers. Not only are they less likely to be employed, but even if they are employed, their average earnings are significantly lower than for married parent families, if only because married parent families have two earners. At the same time, the fact that they are shouldering childcare responsibilities means that they are more likely to take up jobs with irregular schedules to meet parenting needs. They are unlikely to be in jobs that lead to a satisfying career and consequently their lifetime earnings are likely to be low. A recent Pew Research Center report finds that balancing work with raising a family has been a challenge for two parent households. One can only imagine how much tougher it is for mothers managing alone.
What are ways in which we can help families pay for paid leave and childcare?
The US needs a federal paid leave policy that allows mothers to take time off around childbirth without the risk of losing their income (and subsequently their jobs) at the time when they are experiencing an increase in childcare costs. As I have written earlier for Tax Notes, this can be done by allowing employees to access money, in advance, that would ordinarily be available to them at the end of the taxable year through our current system of tax credits, notably the Earned Income Tax Credit, the Child Tax Credit and the Child and Dependent Care Tax Credit.
Combined, this could allow low-income families to receive upwards of $7,000 at the time of childbirth that would help pay for some of the costs of childcare and unpaid leave. The cash amounts would be even larger if the Dependent Care Credit were expanded and made fully refundable so that low-income households could actually benefit from the availability of this credit. The caps on creditable expenses for this credit are not adjusted for inflation and have not been increased to account for the soaring costs of childcare. At the same time, expanding the EITC would help put more money in the hands of these low-income families.
When it comes to family structure, it is important to remember that often single motherhood is not a choice. Isabel Sawhill’s work has shown that more than 70% of single mothers under the age of 30 claim that their pregnancy was unwanted or mistimed. This is particularly true for low-income women. Therefore, adopting policies that may be targeted at reducing the number of unwanted pregnancies to unmarried, low-income mothers may be associated with better outcomes in terms of higher labor force participation rates, higher income levels and higher education investments in children which we typically associate with married parent families.
The more we can encourage and enable families to stay in the labor force, and invest in themselves and the human capital of their children, the better the outcomes for our future generations.
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