The Economics of Parental Leave Policies

I didn't know that parental leave policies are associated with  lower post neonatal infant mortality rates and with higher employment rates for women. This interview with Christopher Ruhm also explains how market failure can prevent the private sector from offering parental leave, and how government intervention can overcome the suboptimal outcome [another part of the interview discusses his research on early childhood education]:

Interview Christopher Ruhm, by Chris English, Region Focus Winter 2008, FRB Richmond: ... RF: Tell us about your research into what sorts of economic effects you find abroad in relation to mandated parental leave policies.

Ruhm: My work on parental leave policies has led to a lot of my other work on health topics. How I got into it was a fluke. I was doing work on advance-notice provisions — the mandate [passed in 1988] that requires firms to tell their workers in advance if management is planning a mass layoff. That issue got me interested in mandated benefits more generally, and what happens when the government tells a firm it has to do something.

When I got interested in the role of parental leave mandates, there weren't many in the United States. There were some states that had mandates and, of course, later the Family and Medical Leave Act was passed as a federal mandate. But even with all that, the entitlements to parental leave are quite weak in the United States relative to other countries. So, what I did was go to European data...

Then I looked at the effects of labor market outcomes for women. Men were the control group in this research, because at the time men almost never took parental leave. What I found was that in the presence of parental leave requirements, women were more likely to be employed. There are a lot of reasons why you would expect that to be true. The most obvious one is the notion of job protection. If you don't have to quit your job to take leave, careers outside of the home become more attractive to women.

It's not entirely obvious, however, that it had to work that way. You can imagine the opposite outcome. Employers might have been encouraged to discriminate against women because women are more likely to actually take the leave, for instance. But there was pretty strong evidence that you did find increased employment-to-population ratios for mothers — a larger percentage of mothers became employed. Yet, I also found that if the leaves got sufficiently long, there was some possible negative effect on wages. In some European countries, you're talking about leave lengths that can equal a few years.

RF: What sorts of child health measures correlate with parental leave policies?

Ruhm: When I use the term parental leave, I'm using it to broadly encompass all kinds of provisions, including maternity leave — the initial period only available to mothers — and broader forms of family leave, which in principle could be available to either parent.

I used the same dataset and I looked at health outcomes for children, mainly infant mortality rates — deaths in the first year. I also looked at neonatal fatalities, which is death of the baby in the first 30 days, versus post-neonatal fatalities, which is death in the rest of the first year. Then I extended the analysis out to age 5.

The results were quite striking and consistent with what I would have expected. In the first 30 days, you didn't see much of a reduction in infant mortality, most likely because neonatal deaths are unrelated to how much leave the parents are taking after the birth. It has more to do with what type of hospital care you're getting or whether the baby is born with a congenital defect of some kind. But in the post-neonatal period and after that, you see reductions in infant mortality correlated with parental leave mandates.

RF: If you assume employees would prefer to work at a company that offers paid family leave benefits, you might also think that the labor market would be competitive enough to incentivize employers to offer those benefits. What barriers exist to the voluntary adoption of family leave options by private firms?

Ruhm: That's a really important issue. The basic question is: When should we or should we not have mandates on employers? The standard argument is that, if I as a worker value parental leave benefits, employers are free to offer that. Presumably, it's also somewhat costly. So if my employer provides leave, it might reduce my wages somewhat. But if the value of the benefit to me of leave is higher than the corresponding wage reduction, I'll take the job and private labor markets will give the desired outcome. Some people believe that is true. There are a couple of issues with that, though. One is that, administratively, it may not be possible to reduce a worker's wage if there's institutional rigidity of any kind — union contracts or internal personnel arrangements — and so wages may not be sufficiently flexible.

A second issue is asymmetric information. Let's say an employer wants to offer a generous leave benefit package while his competitor does not. The problem is that the employer doesn't know whether a specific worker will take advantage of the benefit. The employee himself does know (or at least has better information on the likelihood of this than the employer), so you will have the individuals who are more likely to use the benefit flocking to the employers who offer it. That bids up the cost of doing business quite dramatically and the employer will eventually stop offering the benefit because it places them at a competitive disadvantage.

The other really important point when considering parental leave policies is that we often tend to think about putting mandates on employers. Of course, we have one with the Family and Medical Leave Act, which requires many employers to provide a period of unpaid leave. And when people talk about instituting paid family leave, it's almost always discussed in the context of the employers bearing the full cost of providing it.

It's worth noting that if you look at other nations, particularly European countries, that is almost never the way it's arranged. In virtually all European countries, the cost is borne by the government. Now, it may be paid for through some kind of payroll tax that supports social welfare programs of all kinds, not just paid parental leave benefits. But the cost of offering the paid leave is not directly imposed on employers. You can think of it as sort of an insurance policy and the cost is being spread widely. Now that doesn't mean a system like that is costless to employers. For instance, it may cause some degree of disruption to your business.

Of course, there are legitimate arguments to be made for the U.S. system. Americans tend to prefer smaller government, and more comprehensive social insurance implies a bigger role for government. But I think it is fair to say that if you wanted to create a system that would generate the most employer opposition, the mandate system is it. It also results in the weakest level of benefits. I'll note it's not so different than health insurance these days. The United States is the only country I know of where the primary burden of health insurance is placed on employers. If we're interested in greater social insurance, to help families, to balance these competing needs without imposing excessive costs on employers, the current U.S. model is a pretty expensive way to provide it. [...Full Interview...]