David R. Henderson  

Forcibly Paid Parental Leave

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When is a policy not a policy? When it's the policy you disagree with.

The AEI-Brookings Working Group on Paid Family Leave has published its report, "Paid Family and Medical Leave: An Issue Whose Time Has Come." HT2 Timothy Taylor.

I'm disappointed. It's not just that I disagree with its policy conclusion, especially in the context of large and growing budget deficits. More on that anon. It's also the report's misuse of language. At multiple times throughout the report, authored by Aparna Mathur and Isabel V. Sawhill, the authors state that the United States has no policy on paid parental leave. Since they note that some states do have such a policy, their point is that there is no federal policy. In their introduction, for example, Mathur and Sawhill write, "We all believe the United States needs a paid parental leave policy." But the United States has a paid parental leave policy: it's the absence of forced paid parental leave.

Imagine that you and I are discussing what to do today. You strongly want to go to the zoo. I strongly want not to. You say you have a policy of going to the zoo. That makes sense. But does that mean I don't have a policy on going to the zoo? Not at all. My policy is not to go to the zoo.

Now to the merits of the issue. The authors of the study, based on inputs from the working group, which, by the way, includes Republican economist and former McCain advisor Doug Holtz-Eakin, argue that parents would gain from a policy in which the federal government pays for them to take time off with pay when a child is born. That's true. Normally, though, when economists make that kind of point and argue for it, they do some kind of cost-benefit analysis. In this report, though, such analysis is absent.

Not that there's no analysis. There is. To their credit, the authors and the other members of the group see some big problems with mandating that employers provide paid parental leave. They write:

We also discussed one other approach: an employer mandate. This approach is popular with the general public. However, we do not favor it for two reasons. First, it would be burdensome on employers, especially small businesses and those employing a disproportionately high share of likely parents. Second, it will likely lead to a reluctance to hire female workers of a certain age.

Later in the piece, they expand on this point slightly:
However, an employer mandate for paid family leave would invite damaging unintended consequences. A mandate is not free; it would directly hurt firms' profits, especially small businesses less able to absorb the new cost. Firms would respond to the increase in expected labor costs with some combination of raising prices, cutting other compensation, and reducing employment. Furthermore, a mandate would create a strong incentive for hiring and pay discrimination against those most likely to need or take paid leave.

I'm not sure why they think small businesses are less able to absorb the new cost. But their point about other compensation is on target. I was disappointed that they didn't cite one of Larry Summers's best articles. Here's what I wrote on the issue in "Paid Parental Leave Is Not a Free Lunch," last summer:
Think of how employers would react to such a mandate. They would realize that the main people who would take advantage of paid parental leave would be women of child-bearing age. This makes those women less valuable to them as employees. So their demand--the amount they are willing to pay--for women in that category would fall. Women in that category, on the other hand, would be willing to work for less because the benefit is valuable. In economists' jargon, in short, both the demand curve and the supply curve would fall. The wages of those women, therefore, would fall.

Benefits paid for by recipients

This analysis of mandated benefits is widely accepted among economists. One economist who laid it out clearly, in a 1989 article in the prestigious American Economic Review, was Lawrence Summers. Summers was more recently the Secretary of the Treasury under former president Bill Clinton and later director of President Obama's National Economic Council.


So what policy do they want? A majority of the working group want a new payroll tax. They never say how high, but in the discussion of one such proposal, they seem to imply that the tax would have to be at least 0.4 percent of payroll. Some of the group want to fund the benefit by cutting other government spending or getting rid of some tax preferences.

Consider first the payroll tax. That's profoundly unfair. Everyone would have to pay the payroll tax, including people with no children who will never get to use the benefit. I think I read the report pretty carefully, and I couldn't find even a mention of this fact.

As for cutting other government spending, that's preferable, but, given the tsunami of spending that will happen in the next few decades with Social Security, Medicare, and Medicaid (SSMM) is it really good policy to cut government spending in order to fund a new program? Wouldn't it be better to hold the line on new programs so that government spending on some old programs can be cut when the tsunami hits?

The same goes for tax preferences. There are a lot of tax preferences in the tax code I would like to get rid of. But in the next few decades there will be pressure to get rid of them when the SSMM tsunami hits.

Indeed, along these lines, think back to the payroll tax increase that the majority proposes. When the SSMM tsunami hits, there will be strong pressures to increase the payroll tax. But that cupboard would be slightly more bare if the payroll tax is increased now.

When economists advocate new government programs, they typically at least try to point out some market failure. These economists don't. To be sure, they argue that there are benefits. But there are benefits from a company policy of having a coffee machine. There are also costs. The employers and employees are the only players: they can jointly decide whether it's worth having a coffee machine. If the gain to employees from such a machine outweighs the cost to employers, the employers will provide it and pay slightly less in other compensation, making both employer and employee better off. If the gains to employees from paid parental leave exceed the costs to employers, then employers will provide such leave, as some employers do. In pointing out that mandated benefits have the problems they do, the working group is actually making my implicit point in the above-referenced article: the benefits are less than the costs.

Postscript: Isabel V. Sawhill wrote an excellent item, "Poverty in America," for my Concise Encyclopedia of Economics.


Comments and Sharing






COMMENTS (25 to date)
rabidwombat writes:

Starting off with the argument that the absence of a policy IS a policy strikes me as pedantic, puerile, and pointless. It detracts from what could be a decent policy argument over paid parental leave.

There are equally short-sighted comments throughout. Sure, a payroll tax for parental leave is "profoundly unfair" to people who don't have children. SS taxes are also "profoundly unfair" to people who don't live to be 62. "Profoundly unfair" is kind of the nature of taxes, as most can be framed in a way to benefit one group at the expense of another.

I am amenable to cost-benefit analysis - indeed, I agree that it's necessary in the intersection of policy and economics. That leaves me puzzled as to why you didn't include any yourself. Pointing out some holes in their benefits argument doesn't mean you automatically won, it's just another data point.

Thomas writes:

Cost-benefit analysis is irrelevant, inasmuch as the persons who usually bear the costs don't reap offsetting benefits, which go mainly to other persons. Cost-benefit analysis would be relevant only given the existence of an actual social-welfare function. Such a function, if it existed, would allow me to punch someone in the nose and call it a good thing if my pleasure (measured how?) equaled or exceeded his pain (measured how?). What it all boils down to is that the true (but hidden) justification of any policy that results in income redistribution is "just because" -- just because the advocates want it. It's pure circularity dressed up as economic analysis.

Emily writes:

It's not that I disagree with your analysis, but one possible benefit in the context of that 'tsunami of spending' you mention is that this lowers the cost of having kids and thus maybe we'll get more of them. By lowering the wages for all women of childbearing age via discrimination, you of course reduce the opportunity cost of having kids -- and then further reduce it via the actual paid leave aspect.

I don't think I'd say that in a paper, though.

Jay writes:

@rabidwombat

I agree, saying our policy is an absence of policy is pedantic, but I would rephrase and say the U.S. policy is "leave it up to the companies or individual states to makes such agreements", as I often get irked when FB discussions devolve into "the U.S. has NO paid parental leave". Using David's example, nobody would say the U.S. has no policy on employer provided coffee machines, we would just say that providing such machines doesn't fall under regulators' jurisdiction, which IS a policy.

David Boaz writes:

Saying "the United States has a paid parental leave policy: it's the absence of forced paid parental leave" is not pedantic. It's a direct response to the claim that the U.S. doesn't have a policy on this or something else. And it matters. Our political system, so far, has chosen not to tax Americans and spend their money on this service. It's not simply an absence.

Similarly, when Congress "doesn't act" on bailing out the auto companies or on gun control, the president can't legitimately say "if Congress won't act, I will." First, he has no such power. Second, Congress has acted. It has, for instance, declined to pass President Bush's proposal to bail out GM and Chrysler. That's not the absence of a policy, it's a policy.

AlanG writes:

David Boaz writes, "Similarly, when Congress "doesn't act" on bailing out the auto companies or on gun control, the president can't legitimately say "if Congress won't act, I will." First, he has no such power."

Yet Congress has never issued a war declaration for actions in Iraq or Afghanistan yet here we are maybe two trillion dollars later with little to show. Just today General Mantis told Congress that the Taliban are gaining in Afghanistan and that a new 'war' policy is just weeks away. I can hardly wait.

Parental leave is mere peanuts compared to all the money wasted on wars and one can argue that it benefits society in ways that these wars have and will not.

David R. Henderson writes:

@jay and rabid wombat,
See David Boaz’s answer.
@David Boaz,
Thanks for putting it so well.
@rabidwombat,
I am amenable to cost-benefit analysis - indeed, I agree that it's necessary in the intersection of policy and economics. That leaves me puzzled as to why you didn't include any yourself.
Actually, I did. See the last paragraph before my Postscript.

pyroseed13 writes:

While I don't necessarily disagree with any of the points you make here, I am sort of troubled by the fact that you don't actually respond to perhaps the strongest argument for the policy: Reducing the wage penalty women face from child-bearing.

David R. Henderson writes:

@pyroseed13,
While I don't necessarily disagree with any of the points you make here, I am sort of troubled by the fact that you don't actually respond to perhaps the strongest argument for the policy: Reducing the wage penalty women face from child-bearing.
I did. It’s in the last paragraph before the postscript.

Robert Simmons writes:

"In pointing out that mandated benefits have the problems they do, the working group is actually making my implicit point in the above-referenced article: the benefits are less than the costs."
Not necessarily. They could just think there's a lower cost and/or fairer way to achieve the benefits.

Mark Bahner writes:
In their introduction, for example, Mathur and Sawhill write, "We all believe the United States needs a paid parental leave policy."

I think James Madison said it best when he said:

I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress...to legislate on parental leave.***

***P.S. This is a little-known James Madison quote...part of a long list of congressional powers he could not find in the Constitution. (He went on for days...)

zeke5123 writes:

Rabidwombat:

There are equally short-sighted comments throughout. Sure, a payroll tax for parental leave is "profoundly unfair" to people who don't have children. SS taxes are also "profoundly unfair" to people who don't live to be 62. "Profoundly unfair" is kind of the nature of taxes, as most can be framed in a way to benefit one group at the expense of another.

Disagree. But it is a deeply philosophical question that goes back to the nature of government. What should government do? A reasonable argument is to provide public goods. While these goods provide asymmetric benefits to people, true public goods generally are pareto optimal (or perhaps Kaldor-Hicks efficient with only slight detriments to a few groups of people).

The question then becomes how do you pay for these public goods. A broad base income tax is one explanation; but the problem with that is that it doesn't take into account that people value the public good in different ways, and thus the income tax may in fact result in changing a pareto optimal outcome into a weak Kaldor-Hicks efficient outcome. The better result is benefits taxation, as the cost is more tethered to the benefit, likely making sure the outcome is pareto optimal. Of course, benefit taxiation is difficult for some public goods (e.g., defense). So, a second best solution is an income tax (or consumption tax; property tax, etc.).

The problem arises when you have the government provide private goods utilizing the second best scheme of paying for goods -- now, the transaction is certainly not pareto optimal and likely isn't Kaldor-Hicks efficient either.

To me, that is getting at the Professor's notion of the payroll tax being profoundly unfair. It is making one party worse off to help another party in a situation that may or may not be Kaldor-Hicks efficient. Private goods and income taxes don't mix.

rabidwombat writes:

@both davids, it is just about the definition of pedantic. Characterizing the lack of a policy as a policy is a distinction without a difference. It's exactly the sort of thing that us pedants love to quibble over.

Besides, it's not like people from other countries think that Americans just haven't gotten around to it yet. They recognize the point that you're trying to make - that lacking a policy has been a conscious choice.

That is why I found the first paragraph to be pointless and puerile - it is a childish dig at the authors over a pedantic point when you have more legitimate points coming up.

zeke5123 writes:

@rabidwombat -- I disagree. The article Professor Henderson is commenting on frames the issue as-if there is a gap in the regulation; a gap implies something to fill (i.e., regulators haven't gotten to it yet or overlooked it). In contrast, a deliberate choice not to do something suggest no need to change policy. Framing matters; it isn't just pedantic.

Thaomas writes:

If we have paid family leave, I hope we finance it as we should be financing pensions and health insurance, with a tax on consumption, not on wages. Ideally this would be a progressive consumption tax, but even a mildly regressive tax like a VAT would be preferable to a wage tax, especially a capped wage tax.

Tom West writes:

In pointing out that mandated benefits have the problems they do, the working group is actually making my implicit point in the above-referenced article: the benefits are less than the costs.

If children are considered a private consumption item, then you are correct.

However, given that they're pretty much required in order for the country to continue functioning, I'd consider them *vital* infrastructure to keep the country going that only pays off about 25 years after the initial investment.

In other words, in my opinion, parental leave is no more an attempt at a free lunch than power lines, roads, defense, etc.

Society has piggy-backed off the fact that private individuals have massively subsidized our society since the beginning of time.

However, as technology has made children optional, and as the social opportunities for women have risen, the opportunity cost of having a child has risen through the roof, and naturally enough *far* fewer are willing to "purchase" them.

It seems perfectly natural to me for the government to be involved in any long term infrastructure project. The fact that children *also* have private consumption value doesn't detract from the public value.

J Mann writes:

David, I think I agree with you on the policy, but not on your linguistic point.

I skimmed through the report, and I think it's clear that when the authors say that the US needs a paid parental leave policy, they mean "instead of a policy of not requiring parental leave at the federal level."

I don't see any language that suggests the reason we purportedly pine for their preferred policy is that any policy is preferable to no policy - they consistently argue that their policy is preferable on its merits.

rabidwombat writes:

@zeke5123 - interesting point, though I stand by my assertion. It's not coincidence that people who argue there is a policy gap to fill are also the ones arguing for paid family leave of some sort.

Perhaps there is a cohort of people who are swayed by the "policy gap" framing, but are against paid family leave. I doubt it - it's not like there are bills being passed to prevent federal rules on paid parental leave. Again, a distinction without difference points to pedantry.

@tom west - interesting framing of the issue. Are there research papers that go in depth into that argument?

David R Henderson writes:

@rabidwombat,
Characterizing the lack of a policy as a policy is a distinction without a difference.

If you want to disagree with me, then that's fine, but at least don't misstate my point. I am not saying that the lack of a policy is a policy. I'm saying that the federal government's decision so far not to intervene is a policy. Go back to my zoo analogy and I think you'll see the point.

Mark Bahner writes:
Saying "the United States has a paid parental leave policy: it's the absence of forced paid parental leave" is not pedantic. It's a direct response to the claim that the U.S. doesn't have a policy on this or something else. And it matters. Our political system, so far, has chosen not to tax Americans and spend their money on this service. It's not simply an absence.

Yes, returning to the Constitution (recognizing it's a hopeless cause :-( ), there's this claim that Social Security, Medicare, Medicaid, etc. etc. were in the Constitution all along:

The animals on the farm learn that anything for the "general welfare" is OK

Of course, the author of the piece conveniently fails to mention the Tenth Amendment, and fails to explain why all the programs he thinks were authorized by the Constitution all along did not come about until 150+ years after the Constitution was ratified.

rabidwombat writes:

@david, I think my point is pretty clear, and I didn't misstate your point. I did use my framing, not yours, so perhaps I can restate:

Characterizing the lack of a statutory policy as a policy is a distinction without a difference.

RPLong writes:

wombat, if you think Henderson's point is "pedantic and puerile," then you must surely think that Mathur and Sawhill's statement that the US "needs a parental leave policy" is no less puerile, and for similar reasons. In that case, I wonder why you wouldn't just call everyone puerile for making points of rhetoric when there are better, empirical points to be made about the parental leave issue.

My guess, though, is that you don't think Mathur and Sawhill's statement is puerile. My guess is that you think it's just the kind of language that advocates would use when presenting their case. If so, you could hardly criticize David Henderson for what he wrote.

Those of us who are familiar with policy analysis might view this as a pedantic point, but we who are less familiar with methodical thinking on issues like these might appreciate the distinction Henderson makes here. Okay, you didn't need him to point it out, fine. But maybe he was writing that part of his blog post for people other than you.

rabidwombat writes:

@rplong:

My guess, though, is that you don't think Mathur and Sawhill's statement is puerile. My guess is that you think it's just the kind of language that advocates would use when presenting their case. If so, you could hardly criticize David Henderson for what he wrote.

Overall, fair points. But I am a little lost on how you get from the second sentence to the third.

Pointing out that the lack of a [written/codified/statutory] policy is a [general] policy is attacking a straw man, and that's the part that I find pointless and puerile. No one really thinks that the problem is a lack of any statute. The pro-parental-leave side thinks that the problem is the lack of a specific type of statute, probably one mandating some form of paid parental leave.

This can get into a policy-as-codified-principles vs policy-as-general-principles argument, which gets boring really fast, so I'll stop it there. My overall point is that I found that attack to be off-putting, just as I found the "profoundly unfair" comment to be a bit hackish, in a post that otherwise has a number of good comments.

Mark Bahner writes:
No one really thinks that the problem is a lack of any statute.

?

People who advocate for a statute think that the problem is a lack of any statute.

Hazel Meade writes:

What about short-term disability?
From what I know, most women simply go on STD for up to 3 months following the birth of a child. It's usually paid for via an employer disability insurance policy.

So it's not entirely accurate that there is no maternity leave. Women still get the time off, they just call it something else.

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