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Some Economics of Paid Leave

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The economics of government arranging for workers to get from their employers more paid leave than they would get absent government intervention are no more complicated than are the economics of, say, government arranging for barbers and hairdressers to get from their customers more Christmas gifts than they would get absent government intervention. Here is the first of two planned essays by me on the topic for AIER [2]. A slice:

To see the error that infects the core of all proposals for government to take action to increase the number of workers who have paid leave requires recognition of three simple facts.

First, paid leave is a fringe benefit the provision of which is costly. Someone must pay for it.

Second, because the total pay — wages plus fringe benefits — received by the typical worker reflects [3] the value of that worker’s productivity, unless that worker’s productivity rises, any increase in the value of one of the fringe benefits paid to that worker will cause the value of other fringe benefits, or of wages, paid to that worker to fall.

Third, different workers prefer different mixes of fringe benefits and wages. Some workers prefer to receive all of their pay as wages. Others prefer, say, 95 percent in the form of wages and 5 percent in the form of employee discounts. Yet other workers prefer some still-different combination — say, 80 percent in the form of wages, 15 percent in the form of employer contributions to a pension, and 5 percent in the form of paid leave. There is no one “correct” mix, for all workers, of wages and fringe benefits.

Among the beauties of the absence in the U.S. of government-mandated paid leave is that the market has more flexibility than in other countries to meet as closely as possible different workers’ demands for different mixes of wages and various types of fringe benefits.

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