Tuesday, July 15, 2008

Family Leave

There are only four countries in the world that do not offer some form of paid maternity or parental leave, those being Papau New Guinea, Lesotho, Swaziland and the United States. Besides this being an overtly feminist issue, it is also an economic one and one that, I think, would be beneficial to examine.

The first matter that should be addressed is the one of efficiency. If paid family leave is not provided by firms voluntarily - that is, if in a free market with no governmental mandate, paid family leave is not provided, it is assumed that family leave is inefficient. Market theory espouses that in such a situation, the costs of paid family leave outweigh the benefits. Therefore, mandating paid family leave would result in a situation that is not socially optimal. Mandated paid family leave can be efficient, however, if it corrects a market failure - and a market failure does arise in the externalities associated with raising children. Studies have shown that children are healthier and more successful when they are well-cared for, and when their parents raise them (as opposed to a nanny). Healthy and productive children grow up to become healthy and productive adults, accruing benefits for society - thus, there is a positive externality associated with taking good care of children: it is under-provided by the market, and must therefore be subsidized in some manner by the government. Mandated paid family leave is just such a subsidy.

Also, adverse selection is a problem addressed by mandated paid family leave. If only certain firms offered paid family leave, the individuals most likely to work at such firms will have a higher probability of taking advantage of the benefit, and thus the cost of the benefit to the firm will increase. This will result in lower wages, which further worsens the problem of adverse selection, since the only workers willing to work for the lower wage would be the ones most likely to take advantage of the paid leave benefit. Adverse selection results in a lower than optimal number of firms offering paid family leave. Government mandated leave fixes this problem - there will be no downward wage cycle associated with adverse selection if every firm is forced to offer paid family leave.

The most prescient question regarding mandated paid family leave, in my opinion, is one of wages. If mandated paid family leave has a substantial negative effect on wages (particularly woman's wages) then the externality it corrects might not be worth it. According to economic theory, mandated family leave would shift the supply curve for labor to the right (the attractiveness of the benefit will draw more people into the workforce) and the demand curve to the left (as a result of an increase in costs for the firm). This unambiguously lowers wages, but the true result of mandated paid family leave is not so simple. Wages could increase as a result of paid family leave if it encourages longer job tenure and increases the potential for an individual to move up in the company. So, the net effect of paid family leave is somewhat ambiguous.

Studies have shown that paid family leave not in excess of 3 months results in an increase of 3-4% in women's employment relative to men, and no decrease in wages. Paid family leave programs in excess of that amount of time (and especially in excess of 9 months), however, have shown a noticeable drop wages, albeit increased women's employment.

The ambiguous economic effects notwithstanding, having mandated paid family leave is clearly something that is beneficial - if not to wages, then to society. The most obvious reason is to correct the externality of raising children, but paid family leave also works to create a more hospitable work environment for women, something that is certainly needed.

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