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.