Paid Parental Leave: No Free Lunch
By David Henderson
When the government mandates one component of compensation, other components adjust.
Various friends on Facebook have expressed the view that government-mandated paid parental leave, which seems to have been advocated by Donald Trump supporter Ivanka Trump and is advocated by Hillary Clinton, would help women with young children. These friends’ implicit assumption seems to be that other components of the pay package would not adjust. But that is unrealistic. Wages will adjust downward for the relevant group.
Consider Hillary Clinton’s proposal, which, not surprisingly, is more spelled out than Ivanka Trump’s. Here’s what her web site says:
As president, Hillary will:
Guarantee up to 12 weeks of paid family and medical leave to care for a new child or a seriously ill family member, and up to 12 weeks of medical leave to recover from a serious illness or injury of their own.
Ensure hardworking Americans get at least two-thirds of their current wages, up to a ceiling, while on leave.
Impose no additional costs on businesses, including small businesses.
Fund paid leave by making the wealthy pay their fair share–not by increasing taxes on working families. Hillary will pay for her paid leave plan with tax reforms that will ensure the wealthiest Americans pay their fair share.
I’ll start by assuming that she means it when she says that the pay will be financed solely with higher taxes on wealthier Americans. Then I will relax that assumption and assume that she doesn’t mean it and that employers will have to pay.
Assuming that Employers Don’t Pay
A business that hires people who are likely to be in age zone when they will want leave to take care of their children (disproportionately people between age 23 and 38) will reduce their demand for these people. Why? The business doesn’t have to pay out of pocket for the leave but the business loses something valuable nevertheless. The reason they are not offering unpaid leave now is that their business is disrupted when people take unpaid leave. Ask yourself this: If you went to your employer tomorrow and said that 3 months hence, you want to start taking 12 weeks off without pay, would your employer always say yes? If the answer is no, that suggests that the employer bears a cost from losing your services.
So the demand for such people falls. What about supply? To the extent that people value this option, the supply curve of these people shifts to the right. Net effect: wages fall. In other words, part of the cost of this mandated benefit is borne by the workers who are most likely to take advantage of the benefit.
Assuming that Employers Do Pay
If employers pay, then the result above obtains a fortiori. The demand curve for the relevant population shifts down by more and the supply curve shifts to the right by more. So wages fall even more.
The bottom line: Paid parental leave is not a free lunch.
Of course, not everyone in the 23 to 38 age group plans to have kids and people who don’t have kids would not be able to take advantage of this to the extent that parents would. Ideally, from the business’s viewpoint at least, the employer would be able to identify (1) those who plan to have kids and (2) within (1), those who would take time off, and pay them (2) less. In practice, that would be difficult, and so one result of this policy would be that workers who don’t gain from it would implicitly pay, in lower wages, for those who do.
The reasoning above makes sense as straight microeconomic reasoning. Is there any evidence for it? Actually, yes. And it comes from MIT health economist Jonathan Gruber. Yes, that Jonathan Gruber. In fact, I leaned heavily on his research when he and I both testified before Senators Kennedy and Kassebaum on the Clinton health plan in July 1994. In “The Incidence of Mandated Maternity Benefits,” American Economic Review, Vol. 84, No. 3 (June 1994), pp. 622-641, Gruber studies the effect of “state and federal laws that mandated comprehensive coverage for childbirth in health insurance policies.” His thinking was the same as what I laid out above. To the extent that employers could pay lower wages to women of child-bearing age in response to the law, they would. To study the effect on wages, he took advantage of the fact that some states had such mandates and some did not. He found that wages of women of child-bearing age in states that had no mandate rose more, adjusted for other factors, than wages of child-bearing women in states that imposed a mandate. As a further check, he used the 1978 federal Pregnancy Discrimination Act, which extended the mandate to all states. This gave him a natural experiment. Gruber found that after 1978, wages of women of child-bearing age in states that previously had no mandate rose more slowly than wages of women of child-bearing age in states that already had a mandate. In other words, employers, once they became subject to the mandate, were able to single out women of child-bearing age and pay them less than otherwise. He concluded:
The findings consistently suggest shifting of the costs of the mandates on the order of 100 percent, with little effect on net labor input.