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Is Paid Leave a Pro-Growth Policy?

American Enterprise Institute

August 22, 2023

Some pro-growth public policies seem super obvious, like attracting more high-skill immigrants or reducing the federal paperwork needed to build clean energy facilities and infrastructure. Paid leave, whether mandated by Washington or funded by new taxes on rich people and large companies, might seem like another obviously good thing. Rarely do I ever hear about trade-offs or potential downsides to enacting such ideas, that’s for sure.

To be clear, there are important benefits to paid leave. Workers can devote themselves to nurturing their newest family addition without troubling themselves over a downshift in household finances. Studies indicate that these mini-sabbaticals can improve health outcomes for both the child and mom, a not-insignificant outcome in an era when dual-breadwinner and single-parent homes alike have become the norm. Paid time off also grants families the opportunity to come together and bond during a formative chapter of the new child’s life absent new stresses about money. All good stuff, no doubt.

Yet even the most attractive ideas have trade-offs if you dig deeply enough. And finding the downsides to mandated or government paid leave doesn’t really require much of a search.

One touted benefit is increasing female workforce participation. California, the first US state to implement paid leave in 2004, offers a test case. A 2019 study using tax data found that paid leave there decreased employment and earnings for new mothers—the opposite of initial projections. Over a decade, employment fell 7 percent and annual earnings fell 8 percent. Paid leave access didn’t improve job retention either. Though California’s paid leave is less generous than Europe’s, findings suggest unintended impacts in the US context. I would also point to a 2017 literature review that found the impacts of parental leave on female labor market outcomes range from “negligible to weakly positive.”

Sticking with mandated benefits for a moment, the basic economics is that mandated benefits are equivalent to a tax on employment, and that they reduce the demand for labor and the supply of output. Mandated benefits are seen as inefficient and inequitable because they distort the allocation of resources, create deadweight losses (wasted money and resources that happen when people buy or sell less than they should because of some problem in the market), and benefit some groups at the expense of others. 

Indeed, as my AEI colleague Michael Strain has written, “Such micromanagement would almost surely result in unintended consequences, such as lower cash compensation for workers, and fewer women being promoted up the corporate ladder.” 

And as for having the taxpayer fund a universal program when three-fourths of college-educated workers already get paid leave, Strain adds that “the U.S. does not need another middle-class entitlement program. . . . Unless voters develop an appetite for higher taxes, adding another entitlement benefit that will mostly help the middle class is imprudent.”

A better approach would be to focus on making work pay more for low-income Americans with the added benefit of helping them afford some time off after having a kid. Strain suggests expanding the earned income tax credit to let workers save extra income for unpaid leave. This would also encourage workforce participation, unlike mandated leave that burdens employers and may hurt less-educated women’s job prospects. Along with expanding child tax credits and tax-free savings accounts for new parents, focusing on making work pay for low-income Americans would help them afford time off after having a child.