Paternity Leave: Why it’s Simple Market Economics

Author: Omar Khatib, Johns Hopkins

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Growth in the labor force is one of the key factors in a nation’s potential economic expansion, and a crucial part of that labor force is women. If a higher labor force participation rate is a significant determinant of economic growth, why are governments, specifically the United States’, not enacting policy that is proven to expand participation in women? Recent studies compiled by the Organization for Economic Cooperation and Development (OECD) suggest that if OECD countries saw a comprehensive convergence of men and women in the labor force there would be a total increase of GDP by 12% over the next twenty years.  Moreover, a study by Goldman Sachs further supports this idea, saying that narrowing the gender gap when it comes to employment could push income per capita as high as 14% greater than baseline estimates by 2020, and as much as 20% higher by 2030. If a major economic boost is as simple as getting more and more women to join the work force, the real question becomes how do you get them to join?

        Recently in Japan, Prime Minister Shinzo Abe enacted policy to make maternity leave longer, hoping that by giving women more time to raise their children early on, they’ll return to the work force once their child is of age. The only problem with Abe’s plan is that he’s targeting the wrong side of the family. Increased maternity leave sounds good in theory, but the reality is that the longer new mothers stay out of the workforce, the less likely they are to reenter it. For many women the costs of returning to the work force often outweigh the benefits. When businesses assume that at some point a woman will take a leave of absence because of her child, it leads often to an arrangement where businesses are systematically underpaying and skipping women for promotions. This leads to women being hired into an “economic underclass” with a large portion of jobs having, “low, stagnant salaries, few benefits, few guarantees and little if any possibility of promotion.” Because of the fact that many women are passed over time and time again, once they have children their motivation to return to a career is significantly less.  Not only does this qualify as gender discrimination, but also in reality it really hurts businesses in the long run.

Studies by McKinsey & Company have shown that companies in the top 25% for number of female senior managers earn on average 56% more than companies with none. Management teams that are gender integrated innovate at a higher rate, take fewer sizeable risks, and make generally more knowledgeable decisions. Research done by Credit Suisse furthermore shows, “the share prices of companies with one or more women on the board outperform those with none”, and that, “greater gender diversity in leadership improves communication and reduces corrosive competition among senior managers”. So while Japan’s policy leans towards giving more maternity leave to try to get mothers back into the workforce, what they should be focusing on is getting the fathers to stay home instead.

As shown by policies enacted in Iceland and Sweden, among other places, giving paid paternity leave to fathers has increased the rate at which new mothers reenter the workforce. The only way to have businesses begin to value men and women’s time equally is to pay mothers and fathers equally in terms of leave policies, so as not to incentivize men to continue to work so there isn’t a significant loss in household income. In 1995, Sweden enacted policy that didn’t allow parents to split up parental leave as they wish, but made sure the couple lost a month of subsidized leave if the father didn’t take at least a month off. Both parents were compensated at 90% of their wages, and within a few years four out of every five fathers stayed at home following the birth of their child.

On top of the economic benefits, the effect of fathers spending time substantial amounts of time with their children during early development has been shown to have long-term implications for the social and cognitive of the child. The Swedish government pays highly substantial benefits for a short period of time, which forces mothers to return to their jobs, even on part-time, or lose their paychecks. A study by the Swedish Institute of Labor Market Policy Evaluation showed that a mother’s future wages increased by 7% for each month of paternal leave that their husband took, and because of such policy Sweden now has the highest percentage of working mothers in the world, with 90% of women returning to the work force after having kids. Getting women back into the workforce quicker boosts their long term earning potential and boosts the economy.

Even though paid parental leave is shown certainly to help women reenter the workforce, which in turn boosts the economy and tax revenue, the United States is one of the least generous nations in the world when it comes to paid leave, ranking down at the bottom with nations such as Papua New Guinea, Suirname, and Liberia. State policy changes over the past decade in New Jersey and California have shown that paid parental leave policies not only did not affect companies’ bottom line, but more often than not cut costs when it came to training and turnover. New mothers in California and New Jersey were significantly more likely to return to work after having children, than in other states. While there is some push by some senators to enact nation-wide paid parental leave, financing is, surprisingly enough, the issue that they face. While some may argue that raising federal or state taxes to have fathers stay at home after their children are born classifies as wealth redistribution, its actually just basic economics.

If the United States want men to take time from their jobs, so as to make sure their wives return to the workforce, then it needs to pay men as if they were still working. Taking some money through taxes to ensure that fathers stay at home, and are paid accordingly, following the birth of their child is a simple long-term investment that has been shown to work, and is a step that the United States government, whether on a state or federal level, needs to take.

 

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