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Again, Leave the Market Alone

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Here’s a letter to fellow New Orleanian Corrine Cormier:

Ms. Cormier:

Thanks for your e-mail.

If I understand the basis of your objection to Veronique de Rugy [2]’s and my [3] case against government action to further increase paid leave, it’s this: because few workers bargain individually to determine the precise contents of their pay packages, we can be sure that many workers are not paid their individually ideal mixes of take-home pay and fringe benefits. From this reality you conclude that “government efforts to make more paid leave available are welcome.”

I disagree with your conclusion.

Our world is full of transaction costs; it’s these that prevent more individualized bargaining over the precise contents of pay packages. But the consequences of transactions costs are no more appropriately regarded as ‘inefficient’ than are the consequences of any other costs. Just as consumers are not willing to pay, say, to bargain individually with Coca-Cola in order to obtain for each consumer bottles of Diet Coke individually customized in size so as more precisely to match each consumer’s exact preferences, workers are not willing to pay to bargain individually with employers in order to obtain for each worker a pay package that more precisely matches each worker’s exact preferences.

Evidence shows [4] that U.S. labor markets are competitive. Therefore, there’s every reason to believe that, in this cost-filled world of ours, the current array of available pay-package options is today as close to ‘optimal’ as can be hoped.

But even if you disagree with my conclusion, the case for government action to increase paid leave is weak. Here’s why: if the currently available array of pay-package options is indeed non-optimal, it’s just as likely that paid leave today is oversupplied as it is undersupplied. And if it is in fact oversupplied, then government action of the sort that you endorse will only make matters worse.

The bottom line is this: despite paid-leave advocates’ tendentious assertions to the contrary, there is no more reason to believe that the market fails to supply ‘optimal’ amounts of paid leave than there is to believe that the market fails to supply ‘optimal’ amount of other employee benefits such as break time, workplace comfort, employee discounts, opportunities to telecommute, and company picnics.

Although I and others have asked, there has yet to be offered any coherent case that paid leave is undersupplied. The belief that it is undersupplied is mythical [5].

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