Over at CafeHayek, George Mason University economist Donald Boudreaux, a frequent commenter on this blog, has been in an interesting conversation with two scholars at the American Enterprise Institute. His first post was an open letter to economist Aparna Mathur. She didn’t reply but her colleague Angela Rachidi, whose Ph.D. is in public policy, did.
Boudreaux, noting that Mathur was advocating government intervention to put in place a system of paid parental leave, asked a straightforward question that I think any good economist of any political persuasion would ask: What is the market failure that this would address?
In Boudreaux’s words:
Is there a Pareto-relevant externality that prompts workers to demand too little – or employers to supply too little – paid leave? Is the labor market distorted by information asymmetries, ones that cause paid leave to be uniquely undersupplied? Or are workers generally just too ignorant to understand their own best interests?
Angela Rachidi, in the comments responded:
Imperfect information is a market failure. Fear of hiring discrimination creates an information imbalance when it comes to negotiating compensation. If I’m a 30 something year old women [sic] I can’t ask about paid parental leave for fear of being passed over for a man.
Boudreaux gives an excellent answer here. I recommend reading it.
My answer doesn’t contradict Boudreaux’s answer but I think it complements it.
I think that Dr. Rachidi is getting at something real. Her fear is that by asking about paid parental leave, a 30-something woman will signal that she has a high probability of using it. That would not be a problem if the employer could adjust her pay upfront, paying her a little less each month to make up for the fact that she will likely take the paid parental leave, and not necessarily just once but two or three times over, say, a 6-year period.
But I think it’s rational for an employer–and I would bet that Dr. Rachidi thinks it’s rational for an employer–to worry that if he pays less to 30-something women than to 30-something men with the same skills to do the same job, he will face a discrimination lawsuit. You might respond, “Wait, who says the woman is more likely than the man to want paid parental leave?” I’m guessing that the data say that. But more important for this issue, Dr. Rachidi says that. Otherwise there would be nothing to her expressed fear.
So it looks as if Dr. Rachidi and I are seeing the world the same way.
So what’s the difference between us? My best guess is that she sees the paid parental leave as a transfer from the employer, male employees, and older female employees to young female employees, and thinks that’s a good idea. She doesn’t say why, though.
I notice, though, that in a later comment, Dr. Rachidi writes:
And Dr. Mathur makes an argument in the AEI/Brookings paper on adverse selection as a market failure. Rather than this open letter, I’d like to see your reasoning against her argument.
Fair enough. She doesn’t give a cite, but I’ve found it. Here’s the adverse selection argument from pp. 9-10:
While employers are frequently important sources of innovation, a classic market failure prevents many employers from offering an efficient level of paid leave on their own: adverse selection. If only a few firms offer paid leave, these firms will attract a disproportionate number of “high-risk” employees who are more likely to use the benefits (e.g., women of childbearing age). Employers at these firms might compensate for their larger share of high-cost employees by offering lower wages, leading individuals who are unlikely to use the benefits to avoid these firms. For this reason (and likely others), the implementation of paid leave policies at the employer level has been low, with the majority of innovation occurring in high-wage, high-skilled occupations, such as information technologies, where the applicant pool is small and paid leave benefits can be used to attract top talent.
Offhand, I’m not sure this is adverse selection. It’s selection alright, but is it adverse?
I’ll think about this further.
READER COMMENTS
Scott Sumner
Apr 4 2019 at 8:29pm
The “adverse selection” argument implies that women are less productive. Is that the view of advocates of mandatory paid leave? Is that what they think explains the male/female pay gap?
Mark Z
Apr 5 2019 at 3:56am
I think so. If offering more compensation in the form of paid leave leads the employer to employ a disproportionate number of young women, why is that a problem? It’s only adverse selection if the company is compelled to pay young women more than their marginal productivity, such as if they’re required to pay them the same wages as other employees who use less non-monetary benefits.
This seems analogous to health care: government bans discrimination based on cost (here, cost to the employer in the form of getting more non-monetary benefits). Adverse selection follows. Government responds by mandating that everyone purchase the same service – whether they want it or not – to push everyone into the same pool (in this case, all employees are being forced to ‘buy’ paid leave from their employers).
That’s not a market failure, it’s a government failure.
Phil H
Apr 6 2019 at 2:35am
I can’t speak for anyone else, but if I did think that, would it be bad? I think that women who take maternity leave do impose a cost on (particularly small) businesses; but that it is in the interests of society, the economy as a whole, and human dignity to pay that cost. Is that an embarrassing view to have?
I personally would be very open to the state compensating businesses for this cost; but that would create its own absurdities. A simple anti-discrimination rule does place the burden of the cost on businesses, and I’m OK with that as a solution, too.
Mark Z
Apr 6 2019 at 7:43pm
“it is in the interests of society, the economy as a whole, and human dignity to pay that cost.”
Why? Are you asserting that we have a shortage of people, and need to pay women to have them? Also, this is clearly inconsistent with the view of reproduction as a personal choice that is entirely up to the woman, and the state has no business getting involved in. You can’t assert the latter, but then demand the state subsidize women’s decisions (or force their employers to subsidize them). So much for ‘not my bosses business’ I guess?
Also, women (and men) don’t have children for the benefit of society. They do it because they want to have children, because they find it fulfulling. They don’t need to be paid to produce the next generation. Moreover, for many women, the social value of their labor may be higher than the social value of their reproductive abilty. It’s ironic to see this position – that women are invariably more productive as child-bearers than employees, and therefore it’s socially beneficial to pay them to take time off work and have children -become so accepted on among feminist progressives.
Also, if a woman has a child that turns out to be a cost to society, should she have to pay a tax for having burdened society? If the answer is no, then why should society have to subsidize having children that are an expected gain for society? And if you favor the state subsidizing any activity with a social benefit, why not start with paying corporations a big tax credit for their estimated consumer surplus.
Personally, I do not think it’s a good thing – nor is it necessitated by ‘human dignity’ – to make compensation unrelated to productivity. It’s bad for society. Imagine making it illegal to pay employees who are less productive lower salaries or deny them employment because they are less intelligent (which is mostly beyond one’s control and determined at birth).
Phil H
Apr 7 2019 at 12:50pm
Hi, Mark.
Um… All of this just sounds very doctrinaire to me, I’m afraid.
“Are you asserting that we have a shortage of people,”
Yes. Zero future people exist. I want future people to exist. That’s the textbook definition of a shortage (or rather, of a demand).
“and need to pay women to have them?”
No-one other than women can have them. Women need to be paid or supported in some way. So… yes. Whether they are paid (supported) by companies or by the state or by their families (stereotypically: husbands) is the issue in question. But yes, obviously they need supporting.
“Also, women (and men) don’t have children for the benefit of society. They do it because they want to have children, because they find it fulfulling.”
These things aren’t mutually exclusive.
“They don’t need to be paid to produce the next generation.” – Yes, they do. Covered above.
“women are invariably more productive as child-bearers than employees, and therefore it’s socially beneficial to pay them to take time off work and have children [is an anti-feminist view]”
What? You do know there are goods other than money, right? Women are 100% more productive of children when they are child-bearers. And that’s a kind of production I care about. I’m fairly sure that’s not anti-feminist, or ironic.
“Personally, I do not think it’s a good thing – nor is it necessitated by ‘human dignity’ – to make compensation unrelated to productivity.”
This looks to me like a classic bit of economics overreach. I compensate people with time, love, goods, and money all the time, for reasons completely unrelated to “productivity” in any economic sense. As does every other person in the world. And yes, that’s very necessary for human dignity – the human part, if not the dignity part.
Look, it seems to me that there are two kinds of argument that you can make about maternity leave. You can make strictly economic efficiency arguments about the value that that is generated in the workplace by women (and men), and what kind of policy maximizes that value.
The other kind of argument has to do with the moral status of child-bearing, that it is/isn’t the kind of thing that the market economy and/or the state should be involved in.
I have answers to both these kinds of questions. I’m not sure from your comments that you do. You put a lot of rhetorical questions to me, apparently intending to make it seem like my view is in some way unacceptable, but do you have a coherent set of answers?
Mine, briefly, are: (1) Economics side: Human capital is by far the most valuable thing. Policies that keep women in the workplace maximize the human capital of half the species. We should pursue such policies. (2) Moral side: (a) Generally, we should try to maximize individual freedom. That means removing forces that coerce women to get married and have kids (e.g. old prohibitions and social taboos on women working); and removing disincentives to have kids (e.g. career damage). (b) Generally we should maximize equality. That means minimizing or counterbalancing immutable traits of specific groups so that they are not advantaged/disadvantage by those traits.
Mark Z
Apr 8 2019 at 5:38am
“Um… All of this just sounds very doctrinaire to me, I’m afraid.”
I would say that it all follows from an internally coherent set of principles, as opposed to visceral sentiments.
“Yes. Zero future people exist. I want future people to exist. That’s the textbook definition of a shortage (or rather, of a demand).”
That’s a non sequitur. Zero future everything exists. That doesn’t mean there’s a shortage of everything. Do you have any reason to believe the amount of people we’ll produce absent forced parental leave will be insufficient?
“No-one other than women can have them. Women need to be paid or supported in some way. So… yes. Whether they are paid (supported) by companies or by the state or by their families (stereotypically: husbands) is the issue in question. But yes, obviously they need supporting.”
Lucky for them, men (or other women) also want to have children and have been willing to do so at a level that I’d say is consistent with producing a sufficient number of people.
” Yes, they do. Covered above.”
Not by companies, nor by the state. Otherwise none of us would be here.
“What? You do know there are goods other than money, right? Women are 100% more productive of children when they are child-bearers. And that’s a kind of production I care about. I’m fairly sure that’s not anti-feminist, or ironic.”
So, you don’t care about the production of goods and services? You’re claiming that society would be more productive if we paid more women to have children instead of work. That rests on the assumption that the average woman would be more productive rearing children than working (actually working, not just on paid parental leave) as a doctor, lawyer, teacher, or whatever job she’d be doing otherwise. Having children has an opportunity cost, and you’re assuming that for most women its lower than the value of reproducing.
Regarding the rest of your post:
1. On the economic side: I think you’ve failed to show that we’re under-producing human beings or that the opportunity cost of reproduction is less than its value. I think you’re assuming it is because that’s the position most consistent with what the policy you want to support for less economic reasons.
2. On the moral side, I don’t think natural inequalities justify the use of force to compel some people to subsidize others’ actions, especially when it would make everyone poorer. If naturally intelligent people weren’t better compensated than naturally unintelligent people, we’d have a shortage of doctors, engineers, and scientists, and everyone would be worse off. Ultimately, I value freedom most of all, far more than equality of outcome, and if people really widely believe it’s undignified for a company not to provide parental care, then companies won’t need to be forced to provide it; and if it’s necessary for the state to force them to provide it, then I think it’s probably some people imposing their particular conception of dignity on everyone. And I personally, as a (classical) liberal, don’t want the government legislating morality.
Phil H
Apr 8 2019 at 4:38pm
Hi, Mark.
Briefly – marginal thinking vs. absolute thinking: I have to admit, you’re probably right to take that approach! It’s a maxim of Tyler Cowen’s, isn’t it? Always think at the margin.
Reasons to think incentives might be useful at the margin: In all(?) developed countries now, we reproduce at less than replacement rate.
On the philosophical approach, I merely note with a sigh that you perform the classic trick of othering the government.
“if people really widely believe…then companies won’t need to be forced to…the state…”
In a democratic state, the government represents people. They literally call it that: representative democracy. I understand the reasons for drawing the distinction, but in a modern state, it’s just not sustainable. Politics is how we get stuff done.
“as a (classical) liberal, don’t want the government legislating morality”
This is just a weird over-simplification. Firstly, you slide from dignity to morality, which is odd. Dignity is right there in the first line of the declaration of independence (“all men are created equal”). Justice – an important moral concept – is right there in the first line of the US constitution. The idea that law and morality are separate is a weird myth. The correct reading is that there are some aspects of personal morality that are not agreed among everyone, and liberals don’t want the law trying to mediate those things. But the law is obviously a system of social morality first and foremost. To pick the most obvious example, murder is a moral question, and you do want the government legislating on murder.
Christophe Biocca
Apr 7 2019 at 2:40pm
I think the assumed productivity-relative-to-pay gap isn’t gender-based, but rather between people who intend to use the parental leave and people who don’t.
Under a model where the employer has no way to tell these people apart (and so can’t adjust salary/other benefits based on perceived willingness to use parental leave), offering any parental leave will shift the distribution of employees (through both hiring and turnover) towards people who will make full use of it. People’s preferences can also change over time, so someone who joins your company for the parental leave benefits can the leave for a no-leave-but-higher-salary employer as soon as they decide to stop having further children.
It’s still a weak argument, as this can be accounted for in the benefit structure, employees can, at will, switch between a no-leave compensation package, and the following:
Salaries are lower by $X.
You can take N years of parental leave per M years of work.
If you leave the company or switch back to no-leave plan, any unused leave is paid out.
Pick X/N/M so that you as an employer don’t care which compensation package the employee is using, and they can switch back and forth at will.
It’s a bit complicated, but it deals with all the potential adverse selection:
The employer doesn’t care if you switch jobs right after coming back from parental leave, since the benefit was paid for in advance.
The productivity-per-compensation is the same regardless of whether the employee takes the leave or not. Therefore there’s no need for an employer to care about whether you’ll use the benefit or not.
Because of employer indifference, employees don’t have to worry about signalling preference for one over the other during the hiring process having an impact on their chances of getting hired.
Removing the cross-subsidy between employees eliminates the risk of adverse selection.
Megen de la Mer
Apr 4 2019 at 9:12pm
Would have thought very few competent labor market economists would agree that America’s (presumably meaning US?)labor markets are (fully) competitive – to paraphrase Boudreaux.
BC
Apr 5 2019 at 2:17am
I agree that the case for forcing workers to take some of their compensation in the form of family leave benefits is a weak one. I’m more ambivalent, however, about proposals to pay for leave benefits out of future Social Security benefits. When government siphons off workers’ wages to pay for Social Security, it makes it that much harder for workers to afford to take time off for parental leave. So, it would seem to make sense to allow workers to at least partially opt-out of Social Security to get parental leave benefits instead.
Although one might worry that establishing mandatory parental leave benefits sets a bad precedent, regardless of how financed, it seems that our current political culture is already quite unrestrained in terms of proposing all sorts of not-well-thought-out government-mandated benefits. Parental leave doesn’t really establish a new norm for the proper scope of government. Financing a benefit through forgone Social Security benefits, however, would establish a new norm. One could imagine expanding the idea to lots of benefits in the future. For example, extended unemployment benefits during recessions, college financial aid, health care subsidies — all of these could be paid for through Social Security opt-outs. One could even imagine a universal benefits savings account, which one could use to save for parental leave, unemployment, college, health care, retirement, etc. One could receive contributions into the account in exchange for giving up some future Social Security benefits.
robc
Apr 5 2019 at 9:01am
I believe your proposal is called a “savings account”.
Its a complicated thing, but I think they may have existed in the distant past.
Matthias Görgens
Apr 5 2019 at 3:20am
Interesting point of view. Related closely to protection from firing. And more remotely to ‘who pays for minimum wage?’.
Compare the Copenhagen Interpretation of Ehtics.
Mark Z
Apr 5 2019 at 4:10am
I suspect the argument ultimately is: employees who will likely make use of paid leave – thereby imposing greater cost on the company than employees who don’t – nonetheless must get paid the same salary as those other employees (which means those who plan to use the paid leave will ultimately enjoy higher total compensation than those who don’t plan to).
Why do these employees who are far more likely to use paid leave deserve higher total compensation? The argument, I expect, is that the reason they want more benefits (more generous paid leave than other employees want) is biological and beyond their control: they’re fertile women. If it’s not their fault they cost their company more on average, it isn’t fair to pass the cost specifically onto them; it must be spread evenly among employees.
I would ask whether people who support mandatory paid leave (and prohibitions on insurers charging more for pre-existing conditions, keeping with the health insurance analogy) for this reason if they favor the same approach to food. If a 5ft tall 100 lbs woman and a 6’7, 200 lbs man go to a restaurant, and the man orders twice as much food as the woman, should the restaurant be obligated by law to charge them the same price?
robc
Apr 5 2019 at 9:03am
I think your example at the end shows the problems with these kind of government solutions. If all restautants were all-you-can-eat, then all restaurant quality would end up like current all-you-can-eat restaurants.
Phil H
Apr 6 2019 at 2:31am
Hahaha, perhaps you don’t realise how funny your restaurant example looks from a European perspective.
American servings are famously enormous. The market in America has very obviously come to a decision on the question that you pose: should we serve enough food so that everyone can go away satisfied, no matter how big/small they are? The answer is yes.
Advocates of sufficient benefits to cover for maternity leave are suggesting that companies do the same thing: provide enough benefits for everyone to be satisfied. And if it takes a legislative nudge, I don’t see that as a bad thing.
Mark Z
Apr 6 2019 at 7:34pm
“The market in America has very obviously come to a decision on the question that you pose: should we serve enough food so that everyone can go away satisfied, no matter how big/small they are? The answer is yes.The market in America has very obviously come to a decision on the question that you pose: should we serve enough food so that everyone can go away satisfied, no matter how big/small they are? The answer is yes.”
This is false. The answer is no. Go to an American restaurant and try ordering two hamburgers, I assure you it costs more than one; double hamburgers cost more than single ones; entrees cost more than appetizers. Perhaps you just have a certain stereotypical view of Americans, but no, we do not all order and eat the same amount of foot per meal. Average portion sizes are completely irrelevant.
“Advocates of sufficient benefits to cover for maternity leave are suggesting that companies do the same thing: provide enough benefits for everyone to be satisfied. And if it takes a legislative nudge, I don’t see that as a bad thing.”
By ‘nudge’ you mean ‘force.’ And it won’t leave everyone satisfied. Some people’s compensation declines. What you’re supporting is analagous to forcing everyone to order a 2,000 calorie meal even if they only want 500 calories, so as to redistribute the cost from large people to small ones. That doesn’t leave everyone satisfied. (and again, American restaurants don’t do this already, nor should they, nor should the state force them to)
RPLong
Apr 5 2019 at 9:05am
I read the AEI/Brookings paper you linked to, and one thing I noticed conspicuously missing was any discussion of long-term trends in employer-sponsored parental leave in the United States. What if parental leave has been increasing in the US labor market for years? Wouldn’t this suggest that there is no market failure and that the labor market is actually converging to an optimum?
It would have been nice to know, one way or the other. If there was no long-run increase in employer-sponsored parental leave, it would have made Rachidi’s argument stronger.
I have one quibble with you, David. You write,
The AEI/Brookings report states:
If I understand the argument correctly, then I think her reasoning is that a Pareto improvement can be made by inducing greater labor force participation via paid parental leave policy. It sounds to me like Rachidi believes that the wealth transfer in the short-run would become a universal public benefit in the long run; although I myself don’t agree with that view.
Josh
Apr 5 2019 at 9:36am
I wish policy economists would stop advertising that they are correcting a market failure when the policies they propose are simply redistributing the failure and who it affects.
Workers preferences lie on a continuum from wanting all cash to wanting some mix of cash and benefits. The market provides many different mixes but even still, many workers aren’t at their optimal mix. A government policy in this area would restrict the space of allowed compensation packages. This might move some workers closer to their optimal mix but would move others further from it.
This isn’t correcting the original problem, it’s just redistributing its effect.
Don Boudreaux
Apr 5 2019 at 11:26am
David:
Thanks.
I’m unimpressed with Dr. Mathur’s adverse-selection argument.
First, it assumes that for all workers at each firm – or at least for all workers at the same level (or job-classification) and seniority at each firm – the value of the monetary wages and the package of fringe benefits is the same. Yet I see no reason in reality, other than transaction costs, why such identical pay packages must exist.
An entrepreneurial – Dr. Mathur accurately says ‘innovative’ – firm could offer each employee pay-package A, which includes no paid leave and higher take-home pay, or pay-package B, which includes paid leave and lower take-home pay. In principle, of course, there could also be pay-packages C, D, … N.
I have no idea how common such differential pay-package offerings are in reality. If we do not see such offerings it might be because sufficient satisfaction of these different worker preferences is achieved across different firms rather than within each firm. Alternatively, it might be, as I suggested above, because of transaction costs: the value to employees of having multiple pay-packages among which to choose is too low to justify employers incurring the costs of offering such packages.
If transaction costs are the real-world explanatory variable here, will mandated or otherwise government-arranged paid leave make matters better? Certainly mandating paid leave won’t do so. But it’s unclear to me even how the policies pushed by some AEI scholars and other conservatives will make matters better.
Drs. Mathur and Rachidi would likely say that, by allowing workers to ‘purchase’ paid leave by borrowing against their Social Security funds, more workers of child-bearing age will be willing to work at firms that don’t offer paid leave among workers’ fringe benefits. And so (Drs. Mathur and Rachidi would continue) those firms will be able to keep their take-home wage offerings high enough to attract workers who have no interest in taking paid family leave.
So far so good. But if worker Jones is more likely than is worker Smith to take paid leave, Jones is a less-productive employee over time than is Smith. And so Jones will be employed only if he or she is paid a wage lower than that which is paid to Smith.
Now we encounter a problem with Dr. Mathur’s market-failure story. If the typical employer can overcome the transaction costs of paying otherwise identical workers (Jones and Smith) different wages to reflect Jones’s greater likelihood of taking leave, why can’t the typical employer overcome the transaction costs that attend the employer itself taking the initiative of offering to both the Joneses and the Smiths among their workers the choice of pay-package A or pay-package B?
I readily admit that assumptions can be made that ‘prove’ that the transaction costs in one case differ sufficiently from those in the other case to result in the AEI policy ‘working’ while markets on their own will ‘fail.’ But what are these assumptions? How realistic are they? Surely we – and especially scholars at organizations such as AEI – ought not go about pushing for new government programs simply because some of us are clever enough tell a tale of how markets might, just might, fail relative to how government might, just might, succeed.
Matthias Görgens
Apr 7 2019 at 11:44am
Quite a few employers allow you to take extra paid leave. Or formulated equivalently, some offer ‘salary sacrifice’ options to ‘buy’ extra leave.
David Seltzer
Apr 6 2019 at 12:22pm
Adverse selection: “describes a situation in which one party in a deal has more accurate and different information than the other party. The party with less information is at a disadvantage to the party with more information. This asymmetry causes a lack of efficiency in the price and quantity of goods and services. Most information in a market economy is transferred through prices, which means that adverse selection tends to result from ineffective price signals.” Given the breadth, depth and market efficiencies of social media, it seems information asymmetries disappear almost instantly. So the adverse selection argument seems weak. Labor wages are determined by labor productivity in competitive markets. Does mandatory paid leave make firms less competitive? Is there an externality as the employer must comply rather than negotiate comp packages in free markets? Are less women employed because of the mandate and eventually replaced with technology. The mandate does distort labor markets.
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