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Worker Pay Is Not Determined Arbitrarily

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Here’s a letter to someone who tells me that he and his girlfriend were “surprised and riled” when one of their friends sent to them a link to this article of mine [2].

Mr. Kelly:

Thanks for your e-mail.

You “just don’t see workers being hurt if employers are made legally required to do the right thing by giving them paid leave.”

You might not see the damage that mandated paid leave would inflict on workers, but you can be sure that such damage will result.

First consider a worker who isn’t underpaid – that is, a worker whose pay reflects the value that she contributes to her employer’s output. If government requires that her employer increase her paid leave, the employer’s cost of employing this worker is pushed above the value that she contributes to her employer’s output. The only way the worker will keep her job is if there is an offsetting decrease in the value of some other component of her pay package, such as her hourly money wage.

In effect, this mandate obliges this worker, as a condition of keeping her job, to purchase a particular product sold by her employer – namely, paid leave.

Before you conclude that this worker is thereby made better off, recognize that this mandate is no different than one that, instead of mandating paid leave, mandates that workers annually buy from their employers, say, a minimum of three pairs of shoes or weekly house-cleaning services. Shoes and house-cleaning services are valuable, but workers’ welfare would almost certainly decrease, rather than increase, if government were to oblige them to purchase minimum quantities of these goods and services from their employers.

The case for paid leave is no stronger if we assume, contrary to fact, that workers are generally underpaid. First, there’s no reason to believe that workers would prefer to receive higher incomes in the form of paid leave rather than in the form of more take-home pay. Second, if workers are indeed generally underpaid, this fact would imply that employers have monopoly power over workers. (Economists call it “monopsony power.”) Because mandating paid leave does nothing to rid labor markets of such monopoly power, mandated paid leave would, as when workers are not underpaid, cause the value of workers’ take-home pay or of other fringe benefits to fall in order to offset employers’ costs of supplying more paid leave.

In short, there’s simply no good case to be made for government efforts to increase 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

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