Would expanded family leave hurt workers?

Batkins, Sam ; Brannon, Ike

A good many politicians have elevated the need to reduce income inequality as the paramount purpose of economic policy in the immediate future. There are many ways to pursue such a goal, of course, but the easiest and most popular--at least of late--is to simply reduce the income of the wealthy. Such a maneuver usually doesn't improve anyone's well-being beyond government employees and contractors, but it is a way for the government to demonstrate its dedication to The Cause.

Another method that supposedly would reduce inequality--and one that is becoming au courant--is to provide paid family medical leave to new parents, adult offspring of infirm parents, or couples dealing with other medical or family crises. It is a "socially responsible" benefit and because it is already done in Europe, the thinking goes, it ought to be done here.

The problem is that creating a new, expensive entitlement, at least in this instance, is not necessarily a useful or productive way for government to demonstrate its obeisance to the family. Mandating paid family leave will result in sharply higher employment costs, and the market will ultimately respond by either reducing employment, wages, or some combination thereof, whether government finances the benefit or it comes via a government man date. If not done correctly, it could also create perverse incentives that might harm those most likely to use such benefits.

D.C.'s experiment / Much like the states and localities that have dramatically boosted their minimum wage to huzzahs from the progressive crowd, Washington, D.C. has blazed its own path in its quest to implement family leave. To its credit, the city council realized that mandating that all businesses provide six months of paid leave to new parents would provide a hardy incentive for businesses to avoid hiring women of childbearing age, progressive or not. They came up with a funding method that would avoid that hazard: impose a 1% profits tax on all businesses in the city, regardless of the number of their employees who availed themselves of the benefit, and use the revenue to subsidize on-leave employees' income. This way the cost would be socialized across all profitable businesses, with the government writing the check.

The problem that quickly surfaced was that a mere 1% tax didn't go nearly far enough in funding the desired six months of benefits. To provide workers with that much leave at something approaching their pre-leave wages, the tax would have to be north of 3%. At that rate, the city's normally somnolent Chamber of Commerce was roused to action and prodded its members to stand together in opposition to the tax, which was sufficient to force the District government to retreat to "Plan B." They reduced the scope of the benefit, kept the tax at 1%, and distracted the angry advocates of the benefit with talk of a $15 minimum wage being next on the agenda.

Those are some of the costs, but surely the benefits of paid leave justify the burdens, right? A family medical leave law would pass a cost-benefit analysis? Probably not.

Costs / Many governments across the globe have determined that the benefits of paid family leave are worth the significant regulatory and fiscal costs they impose, but that begs the question: What would more generous family leave practices cost the United States? Data from the Organization for Economic Co-operation and Development detail how much industrialized nations spend on family leave policies. Those data allow us to roughly estimate the cost of the United States adopting mandatory paid leave.

For this empirical comparison, we looked at the per-country spending as a proportion of GDP in three different categories: paternity leave, sick leave, and family medical leave. The United States spends roughly 0.7% of gross domestic product (GDP) on family support, a broad category that includes paternity and maternity leave. That percentage is far smaller than what other developed countries spend on this category. Sweden spends fully 3.6% of its GDP on family leave, more than five times the U.S. ratio. Denmark's spending exceeds 4%, while the Scandinavian average is 3.3%. To put that in perspective, defense spending is less than 1.3% of GDP for the Scandinavian countries, 40% of what it allocates to family leave. The OECD average expenditure for family support is 2.2%.

While the United States may be a laggard when it comes to family leave, it spends a bit more on sick leave policies, a category that includes disability pensions, paid sick leave, and other incapacity-related benefits. Such spending comprises roughly 1.4% of GDP, which amounts to $260 billion a year. That is still well below the OECD average of 1.9% of GDP, and miles away from the vaunted Scandinavian social support. Norway devotes nearly 3.3% of its GDP to sick leave and Sweden spends even more.

The OECD does not report any data on maternity leave for the United States, in part because such benefits--if captured--show up in the sick leave data. According to the data, the OECD average expenditure for paid parental leave is 0.38% of GDP; Sweden spends roughly three-quarters of a point of its GDP on parental leave, compared to 0.62% for Norway and, surprisingly, just 0.29% for France.

If the United States were to devote the same proportion of GDP to sick leave as the rest of the OECD, it would require an additional $90 billion. To match the largesse of Norway and Sweden, the figure would need to be closer to $350 billion. For the United States to reach European levels of family leave support as a proportion of the economy, it would cost more than $520 billion annually. To match OECD spending for maternity and parental leave alone would be at least $70 billion annually--twice that to match Swedish-level generosity.

These figures comport with other studies on the costs of expanding family leave rules, which estimate minimum spending amounts ranging from $159 billion to $306 billion. For example, the "FAMILY Act," sponsored by Rep. Rosa DeLauro (D-Conn.) and Sen. Kirsten Gillibrand (D-N.Y.) and designed to provide 12 weeks of paid family leave, would finance the benefit through a 0.4% payroll tax hike. However, this tax increase would only finance about $30 billion in new annual spending, not nearly enough to cover the designed benefits. For many Americans, paid family leave sounds like a wonderful perk until they realize they're the ones who would pay for their own benefit.

Benefits / Since providing families with paid leave would cost so much money, we should expect similarly outsized benefits. However, there is little evidence that it would do so.

Proponents of paid family leave point to studies showing that it can lead to improved maternal health and declines in depression symptoms. That would not only improve well-being but also reduce health care costs associated with these issues, most of which are currently borne by taxpayers. Proponents also argue that paid leave should contribute to higher labor force participation rates, and in turn higher output, perhaps to the extent that it could almost pay for itself by generating higher tax revenue.

Quantifying how paid leave might affect health outcomes is exceedingly difficult, so we will devote our attention to labor force participation rates, especially considering that many of the benefactors of paid leave would be higher-income households.

California and New Jersey both enacted some form of paid leave legislation in the last decade; however, neither state experienced a sizeable increase in female labor force participation rates. In fact, in both instances, female participation rates declined, matching an overall trend in the economy. That does little to bolster the argument that family leave significantly increases the labor force.

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Looking nationally, the U.S. female labor force participation rate stands at 57%, slightly below the pre-Great Recession peak of 60%, but still well above the OECD average of 51.5%. Scandinavia's average is about 10 percentage points higher.

The rapid increase of women working in the U.S. economy in the second half of the 20th century was an unmitigated good for the economy and society, but it's unreasonable to expect it to ever increase at that rate again. First, women's skills and training have changed drastically since the mid-1900s: today, women are on average more educated than men and have a better employment history. Part of the economic boom created by the entrance of women into the labor market owed to the fact that not only was there an increasing proportion of women entering the labor market, but the average skill level of working women increased concomitantly.

What's more, the overt and systemic discrimination against women even entering the workforce that prevailed in mid-20th-century America has largely disappeared. Women who enter the labor market today are more likely to obtain jobs that make the best use of their skill set.

Finally, the simple fact that the female labor force participation rate today is already at a high level means that it's difficult to see the rate increasing anywhere near its trend in the last century. The decades-long secular decline in the men's labor force participation rate, which is currently just below 70%, or 13 percentage points above women, suggests a rough upper-bound for women's rates. What's more, we live in a world where the female rates have essentially stagnated for the last two decades.

The Affordable Care Act (ACA), the latest social welfare expansion in the United States, was supposed to boost the U.S. economy by ending "job lock" and allowing workers to go where they would be most productive. To some degree it achieved this, although the manifestation of this freedom--a rise in what has come to be pejoratively called the "gig economy," referring to the increasing number of short-term projects, consultancies, and other limited "gigs"--has given its authors heartburn. The ACA also effectively incentivized millions of Americans to leave the labor force because the legislation provides them--for better or worse--the means to obtain affordable health insurance without holding a job.

Claiming that another social welfare expansion--one that would reduce wages and employment as well as create a deadweight loss--can somehow drive increases in GDP is nonsensical. There are numerous policies that would drive GDP growth and increase participation rates, but they don't rely solely on further welfare spending--most of which would go to the welloff--changing the dynamics of the U.S. labor market.

Other people's money / Enacting generous parental support policies would doubtless have benefits for families. But these benefits would primarily accrue to higher-income families and could potentially cost upwards of 3% of GDP. If one parental leave policy could boost labor force participation rates to rarified Scandinavian territory and add more than 12 million people (the result of a 10% increase in female labor force participation) to the workforce, these benefits might justify the costs. Unfortunately, there is little evidence that this would be the result of paid family leave, and it is hard to contemplate any economy-wide benefit that would remotely approach the costs inherent in such a policy change.

Making sound economic policy involves the government making priorities and recognizing the opportunity costs of certain actions, but it's been awhile since Congress or the White House acknowledged the true underlying costs of its actions. For instance, the final floor speech in support of the ACA touted it as the greatest deficit reduction piece of legislation to ever pass through Congress, despite the fact that it will ultimately necessitate Congress spending hundreds of billions of dollars a year. The supposed cost savings were ephemeral at best and non-existent in reality. Similarly, in 2016 Congress passed tax legislation that made a plethora of temporary "tax extenders" permanent with nary a discussion of whether permanence made more sense than simply lowering tax rates for individuals or small businesses.

A statistic that has received almost as much attention as the expanding wage gap--at least among labor economists--has been the shrinking ratio of wages to GDP. After remaining remarkably stable for practically the entire 20th century, this ratio began trending downward and--unlike in other such instances--it shows no signs of regressing toward the mean. For capital to take an increasing share of total income strikes many as a disturbing trend, and there have been numerous proposals to try to "rebalance" the two.

The problem is that it isn't simply the case that capital is receiving a greater share of national income. Rather, a steadily growing share of the portion allocated to labor goes toward paying for benefits. This has occurred both because the cost of providing benefits--especially health insurance--has gone up as well as the fact that government has prodded firms to provide more in the way of non-wage benefits.

While it may seem that asking employers to provide workers with paid time off to take care of an infirm parent or a sick child is the compassionate thing to do, there is no free lunch. The cost of this will largely be borne by the workers, no matter what mechanism is used to finance the benefit. There is no particular reason to think that such a benefit would be progressive--middle and upper-middle class workers will be more likely to have employment covered by such a provision than low-income Americans. If we base the payment for the worker who takes leave on his or her salary, then it will almost assuredly be a regressive benefit.

Mandating more paid leave changes the composition of our compensation further away from wages and salary and more toward benefits, with the bulk of those benefits going to the middle class and above. We are hard-pressed to embrace this as a compassionate solution to what ails the American economy.

SAM BATKINS is director of regulatory policy at the American Action Forum.

IKE BRANNON is a visiting fellow at the Cato Institute and president of Capital Policy Analytics.