Tuesday, July 12, 2016

No Free Lunches - or Child Care

Paid family leave - it’s all the rage! Getting to spend sixteen weeks with that newborn child and still collect a paycheck sounds like a great idea to most people, but it’s another example of economic illiteracy.

The Washington Post describes the DC Council’s efforts to put together such a mandated benefit to city workers, financed by a tax on businesses. The Post being the Post, it adds some editorializing-through-quotation by citing Labor Secretary Perez as saying the DC effort is “an end on a Republican-controlled Congress that has refused to take up the president’s call” for a national family leave law. The least they could have done was interview an economist to explain why this is silly. As this blog is just that - the least I can do - I’ll bridge the gap.

Claiming that the tax to finance family leave is imposed on “businesses” doesn’t mean that the incidence of the tax really falls on businesses. It’s like the Social Security tax of13%, half of which is nominally paid by the employee and half of which is nominally paid by the employer. But employers understand that hiring someone at a wage of, say, $100,000 a year means a cost of $106,500 to the employer, ignoring other employee benefits and hiring costs. If $100,000 is the prevailing wage for the job, then the Social Security tax means paying the employee $93,500 (and change) and paying the government the remaining $6,500. Ultimately, workers bear the entire incidence of the Social Security tax. Similarly, a corporate income tax is paid by the corporation, but the incidence of the tax falls primarily on shareholders.

Consequently, let’s dispense with the fiction that the DC government can tax businesses to pay for this benefit. (The article says “an extra 1%,” without explaining what it’s 1% of, and then acknowledges that no one has any idea whether the tax revenue raised would cover the costs of the benefit.) Sixteen weeks is a long time. For our hypothetical $100,000/year worker, that’s roughly $31,000 of wages. I don’t know how often one would get to use this benefit, so let’s say it’s a one-time deal. If the leave is self-financing, the cost to the worker is the full $31,000, spread over a career. You’re not getting a freebie, you’re paying for it.
Would you rather have $31,000 or a benefit worth $31,000? I know I’d rather have the cash. I can take 16 weeks of unpaid leave and be just as well off, I can take eight weeks of unpaid leave and be $15,500 in cash ahead, or I can take no unpaid leave and pocket the $31,000 - all my choice. Deduct the money from my paycheck, and the only way I get any benefit is by taking the leave.

So employees are better off with the cash - how about employers? Under the forced family leave policy, some employees will take the leave even when they’re prefer to continue to work. Without this policy, employers will be better off by having fewer disruptions to the work force. The cost to employers is the same one way or the other, whether employees are paid in cash or leave, but employers should at least weakly prefer no forced leave policy. (Employers who feel differently - for example, if an employer thinks it attracts a more loyal work force by offering paid leave - are always free to do so. The fact that the DC government, not to mention Secretary Perez, wants to force firms to have these policies means that most firms believe they’re better off by paying the cash instead.)

In summary, it’s another feel-good government policy that doesn’t actually benefit the people it is supposed to benefit - yet voters are duped into supporting it. As for me, show me the money!

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