It’s not long since Paul Frijters raised the subject of paid maternity leave here, inspiring a long and stimulating discussion in the comments. The topic is in the air again, largely because the Productivity Commission has been looking into the issue. Unfortunately I stll haven’t formed an opinion, so I’m hoping that a little more discussion will help me do so. Joshua Gans has a very useful piece on it in The Age today, which I may well adopt as my own opinion.
Before coming back to Joshua’s suggestions, I’d like to summarise the main arguments and the issues they raise.
Employer-provided or employer-subsidised maternity leave is properly regarded as a wage premium using second-order price discrimination. That is, just as cinemas offer discount tickets to pensioners because on average their ‘reservation price’ is lower, employers offer higher wages to a particular group of workers, whose reservation wage is higher, on the basic of an objective characteristic (they are having babies). For private sector employers, this allows them to retain productive workers who might otherwise quit, but is cheaper than paying higher wages to everybody. It would make a lot of sense for the public sector to use this approach too, especially with nurses, and maybe also with teachers. In both cases the decision should be based on profit or cost-benefit considerations for the enterprise in question.
But universal state-subsidised maternity leave, which is what the PC is considering, is a different story, and would need to be based on clear and widely shared social objectives. Unfortunately, the case for it is usually emotive and muddled, like this recent polemic from Pru Goward, whose recommendations were ignored in 2002, and who is still seething:
It is still unbelievable to me that both sides of government are apparently content to see Australian women with babies only a few weeks old struggle back to work because their partner has lost his job, the overtime has dried up or because the average mortgage can no longer be met from one salary […] Innumerable studies showing that women who left their infants too early to return to work were more likely to suffer depression and related illnesses were ignored, despite the cost to employers of paid sick leave. Productivity arguments, labour force retention arguments, fairness arguments (remember, you can be given paid leave for a broken foot but not for a Caesarean delivery) and rights arguments fell on deaf ears. Fertility arguments were received differently apparently it is OK for women to be barefoot and pregnant thus the lump sum maternity payment.
This could just as easily be an argument for unemployment insurance, or mandatory 50% deposits on home loans. The case for paid maternity leave needs to be made much more rigorously than Ms Goward’s, with clear answers to a number of questions. First, is it meant to be form of income distribution in the name of fairness, equity or social insurance; or is meant to modify people’s behaviour? If the former, is it well targeted? If the latter, is the behavioural change in the interest of the mother, the child, or broader society? If it’s the mother or the child whose interest is being served, is it really the state’s business to interfere at all? If it’s broader society, what exactly is the positive externality associated with working women staying at home for a few months? And how can we quantify this externality?
As far as I can make out, a government funded paid maternity leave scheme could be one or more of seven things:
1. A device to redistribute income to households with young children. For those who believe that the main purpose of income redistribution is to promote equal opportunity for children, maternity leave might seem a practical way to support households with children. It would presumably be means tested. In this aspect, maternity leave is one of several kinds of subsidies for families with children, including the baby bonus, family allowances and, indeed, free school education (given that school is compulsory, making it free is effectively an income subsidy for families with school-age children, should they choose to accept it). However, in the greater scheme of things, a few months of paid maternity leave isn’t a big enough sum either to count as significant income distribution, or to motivate a couple to have an extra baby if they otherwise wouldn’t. In any case, if assisting children is the only goal, a family allowance or baby bounus is a better way to meet this objective, since it helps non-working mothers too.
2. A device to redistribute income to specifically to working mothers with children, because they ‘deserve a break’. As far as income redistribution is concerned, it’s not obvious that two-income families are more needy than one-income families. As Joshua Gans points out in his submission to the PC, ‘on a social contracting basis, there is no rationale for a cross-subsidy.’ It’s true that losing the income for a few months is difficult if you’re used to a higher level of consumption, but the obvious solution is for the household to budget for that.
3. An incentive to have children, or more children. The premise here is that Australia needs to increase its population faster — to make us more productive, to redress a generational imbalance, or in the interests of defense against invasion. But the same objections apply as to (1): it’s a small amount in the general scheme of things; and it discriminates for no apparent reason against non-working women. However, it might be limited to working women on pragmatic grounds, on the reasoning that having an extra baby is a bigger sacrifice for a working woman than for a non-working woman, so they need a bigger financial inducement.
4. An incentive for working mothers to have children who otherwise wouldn’t, because it’s good for them to have children. This falls into the category of paternalistic rationales: the assumption, obviously, is that women don’t necessarily know what’s good for them, or at least don’t realise what they are missing out on until they have that baby — that they need to be coaxed off the career treadmill to experience the joy of motherhood. This is not a logically incoherent argument, but it will be hard to get past our libertarian brethren, who don’t even approve of mandatory baby capsules.
5. An incentive for women who were going to have babies anyway, to pursue careers, because it’s good for them to have careers. It’s better that they should be in the workforce so they don’t lose their skills and become unemployable; later when their children are of school age, they will appreciate the income. Implicit in this line of reasoning is the assumption that low-income households, if subsidised for breeding per se, would not be sufficiently forward-looking to choose the career option voluntarily. That’s OK, but, once again, it’s a paternalistic policy, because it supposes the beneficiary to be myopic.
6. An incentive for women who are planning families anyway to keep their jobs, because the nation needs them to work. This is similar to the previous argument, except beneficiary is the nation rather than the woman or her family. It’s the same tactic that the firms use when they retain employees by offering maternity leave (instead of higher pay, which they have to give to everyone), except that the aim is to boost GDP. The purpose such a policy would have is not obvious; it would create more taxable income, but that could hardly be a legitimate objective in itself.
None of aims 4-6 imply a need for paid maternity leave. They could all be be served just by giving working mothers money, and letting them decide for themselves whether to take unpaid maternity leave, or spend the money on childcare or nannies.
7. An incentive for working women to stay at home and bond with their babies rather than put them in a creche. On this rationale, paid maternity leave is essentially a subsidy in kind like food stamps: help is available, but only if you make the sensible choice. This is the only argument for which there is no straightforward objection. It’s a policy measure that’s aimed at the right target, and it’s not necessarily paternalistic, especially if we consider the child as the beneficiary — and society at large, which benefits from having well-adjusted, breastfed children.
We would, however, see low-income households with no children, and low-income households with stay-at-home mothers, cross subsidising high-income households with working mothers. In correcting an externality, an inequity would be created .
Applying a means test to the maternity leave allowance would be one way to overcome that objection. But means tests are anathema to some. Eva Cox, for example, sees paid maternity leave as ‘the basis for a wider set of policies on better conditions for work/family integration’, whatever that means. She thinks means testing is ‘grossly insulting to women in paid work as leave is an industrial condition and Army Reserve leave is not means tested, though government subsidised.’ What’s more, ‘it disrespects women in paid jobs by denying them, and men, paid leave for time spent in parenting a new baby’. (A quick Google tour of Cox’s interventions on this topic reveals that most of her arguments are variations on the ‘insulting’ theme.)
The real problem with means testing is that it limits the efficacy of the policy as a corrective to market failure. One of Joshua Gans’ ideas is to offer income contingent (i..e HECS-style) loans as a way of recouping some of the money after it has achieved its purpose.
But another of Joshua’s ideas — and this is the one he wrote about today — might bypass the cross-subsidy issue altogether, while still fixing the externality.
Joshua wants to subsidise the firm rather than the worker. He advocates a “return to work” tax credit, which the government would give firms when they re-hire women who have taken maternity leave. Women eschew maternity leave not so much because it’s unpaid, as because taking time off disadvantages them in the competition for higher responsibility and promotion. He cites a study by Isabel Metz confirming that taking leave, even just a few months of it, derails women’s careers, and deepens labour market segmentation.
… not only would employers have an incentive to attract workers back, they would have an incentive to encourage them to take leave in the first place. Indeed, they might even choose to provide paid leave themselves, as many organisations already do. Moreover, the more highly paid the employee, the greater the incentive to do this. That means that workplaces will want to encourage leave by fathers as well as by mothers.
The trump card for advocates like Cox, Goward, and Natasha Stott-Despoja is that Australia and the USA are the only OECD countries without paid maternity leave. That makes us sound pretty uncivilised. On the other hand, it would be OK to be the only country without farm subsidies. So let’s get the arguments right before joining the throng. Perhaps we could be leading it instead, in a slightly different direction.