Keep employers in mind as we advocate paid family and medical leave

In 2017, the AEI-Brookings Paid Family Leave Working Group proposed a plan to provide paid parental leave to virtually all US workers. This year, we are extending our work to include medical and family care leave.

The arguments in favor of paid leave on all of these dimensions are very strong. Virtually all industrialized countries provide their workers with paid leave, and often much more generously than we propose to. Such a policy would help all workers, and especially women, take care of their own and their family’s medical needs without giving up their jobs, thus potentially raising their labor force activity and their pay over time (as their continual work experience accumulates). Newborn infants and sick family members would get the care they sorely need. And even employers would benefit from reduced worker turnover in many cases.

But most paid leave advocates who make these arguments frequently leave out one important issue: the costs we will also impose on employers if and when we implement any paid leave proposals.

What are these costs to employers and why should we care? Most policy analysts recognize that, if the federal or state governments impose mandates on employers to directly pay for any paid family leave taken by their employees, this could be quite costly to all except those who provide it already. A preferable option is a payroll tax, levied partly on employers and partly on employees, who jointly contribute to a public fund which then pays for any leaves taken by workers. Such a plan spreads the costs of employee leave-taking much more broadly, without penalizing the particular workers or their employers.

Still, these plans impose some costs on employers. These include any payroll taxes they must pay, and disruption to the workplace associated with employees who will take leave fairly frequently. Even if employers manage to take all or most of the higher taxes out of worker pay (which economic research suggests that they generally do), they will likely perceive that they are paying for at least part of it, and these perceptions will influence their employment behaviors.

But most paid leave advocates who make these arguments frequently leave out one important issue: the costs we will also impose on employers if and when we implement any paid leave proposals.

And workplace disruption can be considerable, especially in small establishments where each worker is key, and where few others are available to cover the work of the missing employee. The disruption will likely be stronger because of job protections for workers taking leave, which almost all plans include, so employers cannot simply fire and replace these workers. In such situations, they will often have to hire and pay “temps,” over and above the taxes they have to pay, and temp work performance might be less strong.

Why should we care? Economists generally worry that imposing costs on employers can generate “unintended consequences” for workers, such as lower wages or less employment for them. Of course, the employer reaction will likely depend on the magnitudes and durations of the costs, and how they compare to the expected productivity and duration of employment for any employees. Employers tend to worry less about such modest costs imposed for their professional and managerial employees, whom they regard as highly productive workers with lengthy attachments to the firms, and for whom paid leave can be considered investments in their productivity and attachment to the firm.

In contrast, employers often have more doubts about the quality and attachment to the firm of their less-educated employees — deservedly or not. Accordingly, there is a somewhat greater risk of them reducing job opportunities for such employees, especially for less-educated women in their child-bearing years or whom they know to have small children or elderly parents. And in jurisdictions where the costs of hiring have already risen substantially — due to very high minimum wages, or “ban the box” regulations, among others — the chances that these additional provisions will add to the already high costs of hiring are even stronger, with employer reductions in hiring (perhaps through relocations to less costly locations) even more likely.

How can we construct paid leave proposals to minimize these costs on employers and the chances that they will reduce employment opportunities for less-skilled female workers? A number of factors can help. (Chris Ruhm’s blog on March 5 considered some of these issues, and I add to his list.)

First, caps in the total number of weeks any employee can claim in any year — for instance, 8 weeks — are important to assuage employer concerns about frequent job absence by some workers. Second, eligibility should be limited to workers who have accrued at least 3 months of job tenure with their given employer, who by this time can at least be assured of the quality of their performance on the job. Third, substantial portions of the payroll tax to fund paid leave should be levied on the workers, who will ultimately bear most of it anyway.

Fourth, public pronouncements about these policies should strongly emphasize that they apply to male as well as female employees, to weaken the association of care-giving with women in the minds of employers. Fifth, we should consider exemptions to job protection for workers in very small establishments — say, fifteen workers or fewer. Finally, and perhaps more controversially, federal or state governments could consider some form of relief to employers in high-cost jurisdictions (e.g., those implementing minimum wages of $15 an hour), such as slightly less generous paid leave provisions or exemptions from other regulations already imposed on them.

Taken together, these provisions would not eliminate all of the costs imposed on employers by expansive paid family leave policies; but they would limit them, both real and perceived. This would allow virtually all workers to gain the paid leave coverage they sorely need, while minimizing the likelihood of negative unintended consequences, such as fewer job opportunities, for these same workers.