There’s No Good Reason to Believe that the Market Supplies Paid Leave Suboptimally

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In my latest column for AIER I challenge the case made by even some conservative economists that paid family leave is undersupplied on the market. A slice:

Predictably, these conservatives assert that real-world labor markets are infected with “imperfect information” and “adverse selection” — tropes commonly chanted by economists whenever they wish to contrive a case for government intervention. Consider the argument made by American Enterprise Institute economist Aparna Mathur:

A classic market failure prevents many employers from offering an efficient level of paid leave on their own: adverse selection. If only a few firms offer paid leave, these firms will attract a disproportionate number of “high-risk” employees who are more likely to use the benefits (e.g., women of childbearing age). Employers at these firms might compensate for their larger share of high-cost employees by offering lower wages, leading individuals who are unlikely to use the benefits to avoid these firms. For this reason (and likely others), the implementation of paid leave policies at the employer level has been low.

In other words, most employers — in order to attract workers who value high wages relative to paid leave — won’t lower wages enough to make it profitable for them to offer more paid leave. Hence, the market supplies too little paid leave relative to take-home pay.

This argument, alas, “proves” too much. It can easily be reversed to demonstrate with equal likelihood that adverse selection causes employers to provide, not too little, but too much paid leave. Dr. Mathur could, with no less veracity, have alternatively written:

A classic market failure prevents many employers from offering an efficient level of take-home pay on their own: adverse selection. If only a few firms offer high take-home pay, these firms will attract a disproportionate number of “high-cost” employees who value high take-home pay relative to paid leave (e.g., women without plans to have children). Employers at these firms might compensate for their larger share of high-cost employees by offering lower amounts of paid leave, leading individuals who are unlikely to want as much take-home pay (relative to paid leave) to avoid these firms. For this reason (and likely others), the implementation of high-wage policies at the employer level has been low.

The result in this alternative formulation is that most employers — in order to attract workers who value paid leave relative to high wages — won’t reduce paid leave enough to make it profitable for them to offer higher wages. Hence, the market supplies too little take-home pay relative to paid leave.

The reasoning in this alternative tale of adverse selection — namely, how it leads to too much paid leave relative to take-home pay — is no less (and no more) sound than is the reasoning Dr. Mathur uses in her attempt to explain how adverse selection leads to too little paid leave relative to take-home pay. In each case a mere hypothetical is asserted; in neither case is there any reason to take the hypothetical seriously as a description of reality.

The case for government intervention surely requires a sturdier basis than the telling of a logically coherent, but empirically unsupported, tale of hypothetical market failure.

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