# Solution to paid parental leave badness- economic crackpot or makes sense?

Was thinking about the paid parental leave schemes. I have come under the impression that they are unfair (unfair under any system) as they stand now.

The fact that it exists forces profit maximising firms to give lower wages to women - they incur a risk premium. This is because women, from the onset, are expected to get pregnant a certain % of the time, and in such a case they will have to have more (paid!) time off than men whose wives get pregnant, and thus incur the firm an economic (i.e. opportunity) and accounting cost. Thus, firms give them less $/hr, even if they are identically skilled. Of course, we're assuming no price floor (no equal pay laws), but the argument still holds as those laws would just create unemployment among women. (See price floor on wikipedia). Let's say that men's wage = Wm, women's wage = Ww = 0.99(Wm). Assume that this disparity is because of the risk-premium due to pregnancy. The labour force can then be divided into 3 groups. A) Men B) Women that don't ever have kids. C) Women that have kids. A) and B) are economically identical. Yet, B) incurs the cost of 0.1(Wm)/hour as a direct result of the subsidisation of C). However, A) incurs no such cost, i.e. cost = 0(Wm)/hour. Thus, women who don't have children are being discriminated against by legislation. It is only equitable, in the spirit of all economic/social perspectives (incl libertarianism), to adjust economic legislation in some manner so as to spread the subsidisation of C) between A) and B) - indistinguishable economic agents. Such a move will have to occur as a percentage of the wage rate of men, as is happening with B). (they are subsidising C) by incurring a 1% loss of wages). So, all in all, B) is covering the costs of C), when A) and B) should be covering the costs of C). Solution? No idea. Slightly higher taxes for men (in line with a correct economic formalization that spreads the subsidisation linearly between men and women), paid into women's superannuation account. Not much transaction costs. Communication would be key. Explaining the economic logic, and why the new laws are not in fact discriminatory, but are correcting a previous systemic form of discrimination. "What's the$ amount of risk premium that women incur because of the change of pregnancy?" A question that may not be able to be answered, and would thus nullify or greatly hinder any attempts at legislating something to solve this.

Could the risk premium be 0, or trivially close to it? Perhaps... though I like to think of HR as sensible. I know that if I was a manager who just wanted to maximise profits, I would pay an identically skilled woman slightly less than the man because the woman may get pregnant, and cost me more \$ than if a man's wife would get pregnant. So I don't think the risk premium is trivially > 0. It could be small or it could make up a significant amount of the disparity. Dunno how we'd find out how much, though (a close estimation that we can be confident in is crucial before changing the law, for obvious reasons).

Stagnation is not fair. Policy stagnation has the same effect on B) as if a price ceiling was placed on B) at 0.99*(market rate). (albeit without the excess demand for B) as is consequential of price ceilings).

THOUGHTS?

EDIT: Sorry, this isn't a "solution", more "pointing out" the wrongness of the IR system as it is now (in Australia at least, and I'm guessing in pretty much every other first world coutry, except maybe hong kong).

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It should actually read 0.01(Wm)/hour not 0.1(Wm)/hour. Editing isn't working though. (Yes I have 2 accounts. Admins already know.)

First, men should spend more time with their kids. Women don't HAVE to take parental leave. Those who do it make the sacrifice because they see the value of nurturing a nascent human life. Some men do this as well.

Second, if people would conserve their income more, paid time-off would not be necessary. Unpaid leave would suffice. The reason people still wouldn't take it is because they'd be afraid of "falling behind the pack" in terms of promotions and informal workplace favoritism. Such social practices need to be eliminated in the workplace, period. It is unacceptable that anyone should be expected to do anything more than perform specific tasks for compensation.

Ideally, structural employment should be replaced with temporary contracts. That way people could simply wait until their contract expires and take a sabbatical for whatever reason before re-entering the work-force. If people were adequately skilled and disciplined in conserving their income, and economic opportunities were sufficiently predictable to count on getting a new contract after one's sabbatical, either or both parents could spend extended periods of time with their children - not to mention more flexible scheduling and home-work/telecommuting.

talk2glenn
This is an excellent analysis of the policy consequences of market distorting activities, like mandatory paid leave for pregnant employees.

But what do you mean by "solution"? The market for labor is distorted by paid maternity leave policies (legislated or voluntary). This is fact, and there is no solution. How to distribute these new labor costs to the labor force is a policy question, but no matter how you distribute them, companies are going to be incurring higher labor costs than in systems without the mandatory benefit, and those costs must be paid.

It's a policy question with no right or wrong answers.

In the United States, paid maternity leave is not a legislative requirement (FMLA requires unpaid leave be provided, but there is no federal provision for paid leave, and I'm not aware of any state programs off the top of my head), but there are voluntary benefit programs for women, such as provisions of short term disability at most large companies allowing you to take disability for pregnancy.

The practical consequence is lower pay for women. Is this "unfair" to women who aren't pregnant? Not really. Most women will become pregnant at some point in their professional lives, so they might rationally accept lower base wages against the "risk" of pregnancy, in the same way people accept lower base wages for disability insurance, generally. Further, because the programs are voluntary, women job-seekers can seek out employment at firms with higher base wages that offer fewer defined pregnancy benefits.

Companies that pass on these higher costs will be at a competitive disadvantage relative to those that do not, because men receive no benefit, so this would make no sense on a voluntary basis (you could argue that some men would rather work at a lower paying but more socially equitable firm, offsetting some of this love, but it's unlikely that the offsets would wash - look at the relative inability of non-profits to attract top tier candidates generally). On a mandatory basis, it would have the effect of lowering the male demand for labor (men would work less). Is the cost of decreased national productivity worth the benefit of everybody paying a share of pregnant women's maternity leave costs? I would say no, but neither option (everybody paying or only women paying) is more efficient on its face, economically speaking, than the other. There are costs and benefits, winners and losers, in both systems. Nobody can be made better off without hurting somebody else.

You could do detailed econometric analysis to see which policy option would have the largest net cost on national productivity (distributed costs or internalized costs), and choose the national cost-minimizing problem. But you'd almost certainly find that the cost-internalizing option (where only women pay for the maternity leave benefits, in the form of lower net wages) is superior; this is a basic economic axiom. Markets operate at their most efficient when everybody pays their own costs (no free loaders).

I thought both major parties were presently advancing policies by which the government rather than the employer pays for maternity leave. (For some reason they're both afraid of it being called a social welfare program; main difference between them is that the opposition wanted taxpayers to antiprogressively distribute wealth in direct proportion to the normal income of the individual recipients.)

Second, if people would conserve their income more, paid time-off would not be necessary. Unpaid leave would suffice. The reason people still wouldn't take it is because they'd be afraid of "falling behind the pack" in terms of promotions and informal workplace favoritism. Such social practices need to be eliminated in the workplace, period. It is unacceptable that anyone should be expected to do anything more than perform specific tasks for compensation.

Ideally, structural employment should be replaced with temporary contracts. That way people could simply wait until their contract expires and take a sabbatical for whatever reason before re-entering the work-force. If people were adequately skilled and disciplined in conserving their income, and economic opportunities were sufficiently predictable to count on getting a new contract after one's sabbatical, either or both parents could spend extended periods of time with their children - not to mention more flexible scheduling and home-work/telecommuting.
So let me get this straight, you don't believe in paid time off? Even holiday time? This is just silly. Paid time off is a good thing, it is basically a reward for working for a company. To not pay people for time off would make people think twice about taking holidays and you face people refusing to take mandatory leave because of loss of income. In the UK, you have to take at least 20 days holiday per year. If you weren't paid for it, who would voluntarily take it? People would lose 4 weeks pay per year (a months pay), that's a lot of money to most. And then to have to save to cover that time would stretch your finances over the rest of the year (you'd have to save a months salary). Effectively lowering your yearly salary rather drastically.

The way I see it, maternity leave gives people the ability to have children and not worry about their job and any subsequent loss of income. To "take a sabatical" as you put it would mean they don't get paid. No income = big problems for most people.

You talk about conserving income, but for a lot of people their pay just doesn't allow for it. Things can be pretty stretched and putting something to the side isn't always easy. More so when you consider how much you would require for maternity leave durations.

A woman on 6 months maternity leave at full pay doesn't have to worry about income throughout that time. A woman who leaves her job as per your above scenario has no such income. She would have to save up 6 months worth of pay just to cover that time, plus a bit more to ensure she could survive if she couldn't get a job. This just isn't realistic.

I appreciate the optimism in your "if people were adequately skilled" quote but it doesn't reflect reality. It is something of an optimistic dream at best.

Also, I'd add that temporary contracts would give bosses a lot more power. Instead of having to fire you or having to make people redundant (and risk having to pay out depending on circumstances), they just wait until your contract expires and get rid of you.

Siv
Gold Member
Let's say that men's wage = Wm, women's wage = Ww = 0.99(Wm). Assume that this disparity is because of the risk-premium due to pregnancy.

The labour force can then be divided into 3 groups.
A) Men
B) Women that don't ever have kids.
C) Women that have kids.

A) and B) are economically identical. Yet, B) incurs the cost of 0.1(Wm)/hour as a direct result of the subsidisation of C). However, A) incurs no such cost, i.e. cost = 0(Wm)/hour.

Thus, women who don't have children are being discriminated against by legislation.
There is a problem with categorizing women into B and C.

There are some women who decide early on that they dont want children, and stick to that decision. But in many other cases, they either want to have children but end up not doing so because they did not find the right guy or could not spare time from their career or they think they dont want children but then later change their mind, either due to peer pressure or maternal instincts (I know, I am one of those women ).

Even women who cannot have children often adopt or sometimes, use a surrogate mother.

So, its not going to be easy splitting women into B and C categories.

Math Is Hard
Staff Emeritus
Gold Member
We have paid paternity leave where I work, so there's also a problem with making A into one category universally.

We have paid paternity leave where I work, so there's also a problem with making A into one category universally.
I think the UK/EU has just brought this in (or is at least fighting to have it).

There is a problem with categorizing women into B and C.

There are some women who decide early on that they dont want children, and stick to that decision. But in many other cases, they either want to have children but end up not doing so because they did not find the right guy or could not spare time from their career or they think they dont want children but then later change their mind, either due to peer pressure or maternal instincts (I know, I am one of those women ).

Even women who cannot have children often adopt or sometimes, use a surrogate mother.

So, its not going to be easy splitting women into B and C categories.
To be fair I don't think imiyakawa is suggesting there are only women who decide at the start of their working life that for the rest of their life they either eventually want children or don't. You could include any number of other categories as you've listed but for the purposes of the model (looking at the effects on women wages in the case maternity of leave) including more categories probably wouldn't change the analysis much but does make the illustration more complicated.

Essentially the 'discount' on wages for women means that women who don't take leave (B) effectively subsidise the women who do (C) because B could earn wages equal to A (all else being equal) if employer's were able to distinguish between the types B and C. This is because in this model employer's face an adverse selection problem when hiring women because they can't distinguish between women who may decide to take parental leave and women who don't, at the time of hiring. If employer's could distinguish between the two types then women who don't take leave (B) (all other things being equal) will get the same wage as men (A) and the women who do take leave (C) get a lower wage than the status quo.

We have paid paternity leave where I work, so there's also a problem with making A into one category universally.
This does change the analysis but to be fair imiyakawa's model is only addressing the the case where women get maternity leave.

You could look at the situation where both men and women can take parental leave and would come up with similar implications. People who don't take leave (A) will get same wage as people who do (B). Assuming no adverse selection problem then employer's can distinguish between A and B at time of hiring and all other things being equal A will get higher wages. The adverse selection problem means that type A are subsidising type B.

I think imiyakawa set out interesting example of how economists might look at this issue in terms of distribution of income and efficiency. This example highlights the types of issue that arise from any policy discussion in terms of tradeoff between efficiency and equity, or distribution of income between one group and another group.

On a final note, these are relatively simple models which can be extended on to include any number of other cases in case if any one thinks the analysis is quite narrow.

If people were to choose option C, do you not think companies would discriminate in the hiring? Already, women are asked time and time again about kids. Do they have kids? Do they plan on having kids? Do they have someone to watch the kids?

While I have been asked the questions numerous times, my husband has never once been asked this in all his interviews. You know the people who ask are concerned about a woman leaving due to pregnancy. However, a woman may not know she is pregnant and she definitely does not know WHEN she will get pregnant, if she even can.

I believe it is more than just a pay issue, it is a "who will do the job when you are gone issue."

Siv
Gold Member
You bring up a very valid point, AnaShep.

On a related note ... as a woman manager, I am often torn between 2 thoughts.

As a woman, a working mother, I strongly realize the importance of not discriminating based on gender, because of the belief that a women is more likely to leave when she gets married or becomes a mother etc.

On the other hand, as a manager, I have to admit the fact that women often do leave for those very reasons.

But last year I decided to do a small statistical analysis - of checking the attrition of my male vs female employees. Guess what I found ....

In % terms (not in absolute terms because the % of women employees in my organization is much lesser than the % of men employees, a sad fact), the number of female employees who leave is not significantly different from the number of male employees who leave. Even at different stages in life.
While the guys cite other reasons (growth, better compensation, chances to work in the US and Europe etc), the women often cite marriage(the dislocation which comes along with marriage) and childbirth as the reason.

So technically, managers have no reason to be more worried about women employees leaving.

But the problem arises in rapid growth employees, those who are doing very well and growing fast.
If these are men, they usually dont leave because they are happy in their job and have a lot to look forward to. However, women might still do so, because they get married to a guy who lives in a different city/country, or because they are having a baby.

So technically, managers have no reason to be more worried about women employees leaving.
Even if the rates of attrition are the same, women would still be more of a financial burden on firms because, at least in Australia, they can claim months of paid leave (men get much less paid leave in comparison).

Even if the rates of attrition are the same, women would still be more of a financial burden on firms because, at least in Australia, they can claim months of paid leave (men get much less paid leave in comparison).
Months? As in maternity leave?

In the UK, the mother can get up to 9 months of paid maternity leave. In comparison, at the moment men can only get 2 weeks (not sure if it is paid or unpaid) paternity leave.

In this particular situation you can only attribute a higher chance of a woman taking extended leave (and as such becoming a burden on the company) to the fact that men cannot do so.

ShawnD