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Don’t Leave Your Price Theory Behind

Here’s a letter to Brian Shaughnessy, who is new to Cafe Hayek:

Mr. Shaughnessy:

Thanks for your e-mail.

Perhaps you’re correct that I misinterpret what Angela Rachidi means when she argues that “imperfect information” causes the market to undersupply paid leave. You write that “the group with imperfect information is not employers, it is workers. They have incomplete information about what employers are willing [to] offer by way of paid leave.”

If your interpretation of her meaning is correct, it remains a weak justification for government action to increase paid leave. A standard achievement of competition is that it obliges bargainers to reveal to each other their best offers. Workers don’t need to read employers’ minds, or even to have better bargaining skills than employers. Competition among employers for workers obliges employers to offer to workers their best employment deals – which means not only pay that fully reflects worker productivity but also that features the optimal mix of take-home pay and fringe benefits. (By the way, for evidence that worker pay in the U.S. continues to keep pace with worker productivity – that is, for evidence that labor markets in the U.S. are indeed competitive – see this 2014 piece in the Wall Street Journal by Liya Palagashvili and me.)

Briefly on your other point about adverse selection: because employers can adjust the value of take-home pay and other fringe benefits to offset the cost they incur to offer paid leave, I’ve encountered no credible argument to support the claim adverse selection keeps paid leave at sub-optimal levels in the market.

Ironically, the kinds of paid-leave policies now promoted by some scholars at AEI would, were they enacted, result for many workers in a sub-optimal mix of forms of pay. By artificially increasing the prospects of workers taking family leave, these policies would result in lower take-home pay for workers in their 20s and 30s and, possibly, thereby reduce these workers’ participation in the labor force.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030