Reality Isn’t Optional

by Don Boudreaux on April 2, 2019

in Reality Is Not Optional, Regulation, Seen and Unseen, Work

Here’s another letter to Leah Grant, a new and very earnest opponent of the point of view expressed at Cafe Hayek:

Ms. Grant:

Thanks for your e-mail in which you spiritedly object to my case against government-mandated paid family leave. You accuse me of resting my case on “blind faith that the ‘free’ market could off-set paid leave by cutting other benefits.”

With respect, I rely not on faith but on reason, and reason tells me that mandating changes in the forms in which workers are paid will not improve their welfare, and, indeed, will almost certainly worsen it.

Suppose that an employer currently pays each of its workers a weekly salary of $1,000 using only twenty-dollar bills. That is, each worker every week receives payment in the form of fifty $20 bills. Now suppose that the government, noting that a $100 bill is more valuable than is a $20 bill, mandates that all salaries be paid using only $100 bills.

Do you think that the result of this mandate will be that each worker’s weekly payment will rise to fifty $100 bills? Of course not. You understand that the only result of this government mandate will be that, rather than each week receiving his or her salary in the form of fifty $20 bills, each worker each week will receive his or her salary in the form of ten $100 bills.

In this example, the employer – easily able to change the forms in which it pays its workers – is neither worse nor better off. The employees are perhaps a bit worse off, given that $100 bills are less convenient to use than are $20 bills. But regardless, real-world employers – much like the employer in this example – will find it easy to change the forms in which they pay their workers: mandated paid leave will prompt employers simply to reduce the value of pension contributions and other fringe benefits, or of workers’ base pay, in order to offset the cost of supplying mandated paid leave.

As in my hypothetical example, mandated paid leave is unlikely to much, if at all, affect employers. But unlike in my example, in the real world many workers will suffer significant  negative consequences. Mandated paid leave will harm workers who, for example, value cash payments more highly than paid leave. Ditto for workers who value more-comprehensive employer-supplied health insurance more highly than paid leave.

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

P.S. The empirical record supports my argument. See, for example, this paper by Jonathan Gruber (an economist who no one would ever accuse of having “blind faith” in the free market).

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