The Economics of Paid Leave

By Donald J. Boudreaux

Paid leave is now very popular. Should it be a mandated benefit? No. There is every reason to believe that markets provide the optimal benefit. 

Here’s AIER Senior Fellow Veronique de Rugy summarizing recent research by the Cato Institute’s Vanessa Brown Calder:

Using more comprehensive government metrics, she shows that without the government mandating or paying for a paid parental leave benefit, between 45 percent and 63 percent of women report already having access to paid leave. The best part of this story is actually that the data show how the private sector has steadily increased its provision of paid leave to first-time mothers from 16 percent since the 1960s to over 50 percent in 2008 (the last time data were available). If you add disability (which is often used as paid leave), that number grows to 61 percent, which is a 280 percent increase over the period.

Paid leave is also popular politically. Even some GOP legislators and conservative pundits are eager to have the government take action to encourage yet more paid leave.

Current proposals for government policies that increase the number of workers who have paid leave as one of their fringe benefits vary in their details. But all such proposals — whether from the political Left, Right, or center — are mired in deep confusion.

Reality Isn’t Created by the State

Consider first the way that proposals for government action on the paid-leave front are today often introduced to the American public. This 2016 headline at Politifact is typical: “Yes, the United States is the only industrialized nation without paid family leave.”

Wrong. While the United States is indeed the only industrialized nation in which paid leave is not mandated by government, it is plainly untrue that there is no paid leave in the U.S. As noted above, many workers in the U.S. have some paid leave — a reality that belies the naïve notion that nothing good exists unless it be either mandated or supplied by the state.

Stunningly, even a pundit at the conservative National Review — Alexandra DeSanctis — writes as though she agrees with Hillary Clinton’s one-time advisor Heather Boushey, who interprets the absence of government-mandated paid leave in the U.S. as evidence that “we’re falling behind our economic competitors.”

This assertion is nonsense. As economist Daniel Mitchell notes, “‘We’re falling behind’ only in the race to impose more government. We’re way ahead in the race for more prosperity.”

Economics of Paid Leave

To see the error that infects the core of all proposals for government to take action to increase the number of workers who have paid leave requires recognition of three simple facts.

First, paid leave is a fringe benefit the provision of which is costly. Someone must pay for it.

Second, because the total pay — wages plus fringe benefits — received by the typical worker reflects the value of that worker’s productivity, unless that worker’s productivity rises, any increase in the value of one of the fringe benefits paid to that worker will cause the value of other fringe benefits, or of wages, paid to that worker to fall.

Third, different workers prefer different mixes of fringe benefits and wages. Some workers prefer to receive all of their pay as wages. Others prefer, say, 95 percent in the form of wages and 5 percent in the form of employee discounts. Yet other workers prefer some still-different combination — say, 80 percent in the form of wages, 15 percent in the form of employer contributions to a pension, and 5 percent in the form of paid leave. There is no one “correct” mix, for all workers, of wages and fringe benefits.

Among the beauties of the absence in the U.S. of government-mandated paid leave is that the market has more flexibility than in other countries to meet as closely as possible different workers’ demands for different mixes of wages and various types of fringe benefits.

No Market Failure

An odd aspect of today’s calls for government action to increase paid leave is that most of these calls are unaccompanied by allegations of market failure. In principle (if not so much in practice), government intervention is economically justified if the market is reasonably suspected of supplying some good or service in quantities that are less than optimal.

A classic example is the abatement of air pollution. Because air cleansed of pollution is breathed even by those individuals who pay nothing to abate the pollution, too few people will voluntarily pay for the good “pollution abatement.” Thus in principle, a theoretically coherent argument can be made for government intervention to supply this good.

Yet in the case of fringe benefits paid to workers, there is absolutely no reason in theory to believe that paid family leave is underprovided by the market. Nor is there any empirical evidence of any such underprovision. Much of the clamor for more paid family leaves seems to be driven by surveys that reveal that most workers want more paid leave if other people pay for it.

Well, duh. If other people will pay for it, I too want more paid leave than I currently have. Much more, in fact. And I want also a limousine to drive me to and from work each day, preferably one stocked in the evenings with chilled Dom Perignon. As Emily Ekins reports, however, enthusiasm for paid leave falls dramatically if people understand that they must pay for it. No surprise here.

The fact that the market does not supply as much paid leave as people would want if they did not have to pay full price for it is not a market failure; it’s a market success.

With every reason to suppose that the market supplies the fringe benefit “paid family leave” in optimal quantities — that is, with every reason to believe that, on this front, the market is succeeding — any government-engineered increase in the supply of paid family leave would cause the market to mimic a market failure. The amounts of paid leave supplied would thereby be excessive, thus causing the value of wages and of other types of fringe benefits to fall below their optimal levels. Workers would be made worse off.

Some conservatives nevertheless think that their plans for government to encourage more paid leave pass economic muster. As I’ll explain in my next column, these conservatives are mistaken.

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Donald J. Boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.