How Paid Parental Leave Accidentally Promotes Inequality

by | May 17, 2017

How Paid Parental Leave Accidentally Promotes Inequality

by | May 17, 2017

In honor of Mother’s Day, Facebook executive Sheryl Sandberg called for a new public policy to limit economic opportunities and choices for women.

Naturally, she did not phrase it quite like that. But among other policy asks in her pronouncement, Sandberg called for a mandatory paid family leave policy. The primary goal of such a policy is to help women. Unfortunately, the economic implications of the policy, if enacted, will be as I described above–reducing opportunities and choices for women.*

This unpleasant outcome is likely to be a surprise to many. In the US, there is overwhelming popular support for implementing some type of paid family leave policy. According to a recent Pew Research survey, fully 82% of Americans believe mothers should receive paid leave after having a child, while 69% believe fathers should get such leave.

No doubt, the supporters of such policies, like Sandberg, have the best of intentions. They probably have never been confronted with the fact that those policies might harm the people they want to lift up.

This stark disconnect between goals and outcomes makes paid family leave an ideal policy for exploring and understanding the unintended consequences of economic intervention. Let’s go through it.

The Basics

As the name implies, a mandatory paid family leave policy works by requiring employers give their employees a certain minimum amount time off upon having a child. The policy will stipulate what rate of pay will be given during leave and the maximum number of weeks that can be taken. Employers must allow employees to resume their jobs at the end of the leave period.

The source of payments during the leave period will vary depending on the policy. In some countries that have these policies, the employers are forced to foot the cost directly–making it similar to how vacation pay is handled. In other places, employees are forced to pay into a fund run by the government and then benefits for everyone are paid out of that pool. This model is similar to how Social Security works.

A final source of variation in the policies is who is eligible for benefits and when. In some policy variants, only women are eligible for parental leave or may be eligible for a longer duration than men. Additionally, in other policies, paid leave would apply in other circumstances besides having a child–perhaps military deployment of a spouse or taking care of a sick relative.

These different leave justifications will have economic consequences of their own. However, to keep things simple, we’ll focus on parental leave policies for this analysis.

Like Products, Jobs Have Trade-offs

For economic purposes, it’s helpful to analyze a job in much the same way we look at a major consumer product. Let’s take a phone as an example.

When buying a phone, there are several factors to consider–price, speed, screen quality, camera quality, OS, battery life, appearance, weight, and so on. On many of these criteria, almost everyone will agree what is better. All else equal, people will prefer a faster phone, a better camera, and a longer battery life. The problem is that all these features have trade-offs. If you want a faster phone, you’ll probably need to pay more. If you want a longer battery life, then you might also have a heavier phone to accommodate the bigger battery.

While that may have seemed like a large tangent, similar observations can be made about jobs. Here, there are probably even more factors to consider: salary, location, growth prospects, interest in field, vacation time, average hours per week, health benefits, and parental leave benefits (if any), among others. Generally speaking, most people prefer a job that pays more, offers more vacation time, and requires less time at work (perhaps because it’s part time or just has fewer late nights). But again, there are trade-offs.

As a personal example, my previous job provided 5 weeks of paid vacation and a multi-month sabbatical option. The downside was that the salary was lower and we were expected to work 60+ hour weeks on a somewhat regular basis. For people that really like to travel, that mixture of compensation and obligations works out perfectly. Others prefer the higher salary and more consistent year-round workload that is offered by competing employers in my field, even if that generally means less vacation.

The reason these types of trade-offs exist in employment is because they represent a cost to the employer. When an employer hires someone for their services, they’re paying much more than just a salary–they also have to consider payroll taxes, health benefits, vacation, 401k benefits, and so on. Hypothetically, suppose Employee A wants a $20,000 health insurance plan with $80,000 in salary and other compensation, and Employee B wants a $30,000 health plan and was willing to accept a $70,000 salary. If the tax implications of both arrangements were the same, the employer should be indifferent between these setups.**

The Cost of Parental Leave

Parental leave also has a cost for employers. The cost of this type of benefit will depend on the length of the leave offered and how easy it is to find someone else to cover the job during an absence. Employers might have to pay fellow employees overtime to cover the extra work or even hire a contractor. The more unique and essential the job is, the more expensive it will be to grant a long leave. Then, once the total raw cost of the leave is determined, the employer has to estimate the probability that a prospective employee is actually going to take advantage of this benefit in the near future.

This probability consideration is what leads to the unintended consequences. By default, most employers probably are not going to ask awkward family planning questions in a job interview. Instead, they are more likely to estimate the probability, consciously or not, based on demographics.

Thus, all else equal, a 20-something female who recently graduated college would be viewed as much more likely have a child in the near future than a 45-year-old male. In turn, that means the expected cost (probability x raw cost) of the leave benefit for the 20-something female is higher than the expected cost for the male. Since employers are generally willing to pay a certain all-in cost, they might respond to this circumstance by choosing the male employee (because he’s cheaper) or by hiring the female at a lower salary (to compensate for the higher leave cost). Either outcome clearly leaves the female candidate at a disadvantage, through no fault of her own.

This outcome is not ideal, but it is the way that trade-offs work in compensation. A faster phone means a higher price. A longer or more likely leave benefit means a more expensive employee.

This then leads to a perverse outcome. In general, the same people that advocate most for mandatory parental leave are also the ones that are concerned about the gender pay gap–the idea that men make more than women in work place. Ironically, mandatory parental leave policies would have the effect of exacerbating any gap that currently exists.

Not Just a Theory

Above we traced through the economic implications of paid parental leave on the employer’s decision-making process. The effects we predicted are those that standard economic theory would suggest. They are logical but also a bit abstract.

Fortunately, in this case, we don’t need to rest our case on theory alone. Since the United States is (thankfully) late to the game on implementing mandatory parental leave policies, we have the benefit of observing their effects in other countries. The results are broadly in line with what the theory would predict.

For example, in some countries, the mandatory parental leave policies have been structured to offer longer leave times for women. Based on our analysis above, we know this would also increase the effective leave cost of women versus men, putting women at an even greater disadvantage relative to men when competing for work. Thus, the following observation from The Washington Post should come as no surprise:

Instead, decades of experience shows that long leave for women only, understandably, has made private-sector employers reluctant to hire, retain and promote them. That’s why in Sweden — which from 1974 to 1995 offered only women generous maternity leave — most women wound up working part time in the public sector and are still juggling the traditional role of primary caregiver at home.

This disparate outcome can be reduced somewhat if the leave policy offers the same time to men and women. However, since women are still more likely to actually take leave, the expected leave cost for women under most arrangements will still be higher.***

The New York Times found a similar outcome when reviewing the impact of US’s Family and Medical Leave Act (FMLA), passed back in 1993. The FMLA mandates employers give 12 weeks of unpaid leave to men or women in response to certain life events, such as having a child. After the law was implemented, women were 5 percent more likely to remain employed (as the law requires employers to retain workers after leave), but were 8 percent less likely to get promotions. Again, women get stuck in lower-paying work than they would be otherwise.

Unfortunately, this is how economic intervention often works out in practice. Policies designed to combat inequality end up promoting it.

A Better Solution: Choice

Now, if you are a woman who is in the workforce and also planning to have kids, it’s possible, perhaps even likely, that you’d be willing to sacrifice a higher salary to have a generous paid leave benefit. It’s possible many men who are planning to have a family would happily make the same trade-off. If everyone in society had those exact same priorities, then implementing a mandatory paid parental leave policy would do little harm.

The trouble is that there are many women (and men) who would not opt to make this trade-off. Such people may just be heavily focused on their careers or may not be planning to have kids at all. If they are forced to be eligible for paid leave by the passage of a new statute, then they will be made worse off as a result. Women who have no interest in taking a paid leave of absence may get treated like a flight risk anyway and find it more difficult to advance their careers. And even if this doesn’t occur, they’ll still be forced to directly pay for a benefit they have no interest in taking in the form of a lower salary.

This is the consequence of implementing a one-size-fits-all solution when there really is more than one size. Some people, maybe even a majority, will get a solution that fits them–but everyone else suffers.

A better solution is one where no employee is forced to make a trade-off they didn’t agree to, and employers are free to design leave options as they see fit. This outcome is ideal because it would allow each individual choose the mix of benefits they most prefer, and young women wouldn’t automatically be adjudged a flight risk from the minute they cross the threshold.

A critic might charge that employees seeking generous paid leave packages simply won’t be able to find it in the US, absent a law requiring it. However, economics suggests otherwise. At least some employers–particularly those that have many employees performing the same types of job and can thus easily minimize the cost of leave–will have a strong incentive to voluntarily offer generous leave policies and flexible schedules to cater to current or future working mothers and fathers. By offering generous leave, such firms might be able to economize on overall compensation cost and gain a competitive advantage. Indeed, this isn’t just theoretical speculation–several big name employers have taken this path.

This ideal solution where employee and employer choice is maximized is not that far off from the model that prevails in the US today. The unpaid FMLA reduces this freedom, and a few states have adopted their own paid family leave policies that reduce it further for their residents. But aside from that, the US is lagging far behind most of the developed world. And on this issue, that’s a decidedly good thing.

*To be fair, mandatory paid leave wasn’t the only harmful policy Sandberg called for in her post. She also advocated raising the minimum wage (which disproportionately harms the poorest workers) and vaguely asked for affordable child care, without offering specifics on that front.

**In reality, the tax implications favor employers offering more compensation in the form of health coverage rather than salary.

***I say “most arrangements” here because the NYT piece also discusses an interesting policy modification called the “daddy quota” in Norway that tries to directly incentivize men to take time off and correct for unequal utilization. Apparently policy has changed utilization, and has worked in that sense. To whatever extent that’s true, we would expect Norway’s paid family regime to produce less inequality among men and women. However, the policy would still harm Norwegians who would prefer a higher salary or don’t plan to have children.

Eric Schuler

Eric Schuler

Eric Schuler is a contributor to The Libertarian Institute, with a focus on economics and US foreign policy. Follow his work here and on Twitter.

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