Most of the initial reactions to Tony Abbott’s maternity leave proposal have focussed on its political motivation, on how it squares with his personal ideology, and on reactions of the business lobby.
As far as the politics are concerned, it looks like standard Howard era populism, seizing on the winds of prevailing opinion. As for the financing, the interesting aspect is not that business will pay for it. In fact, it would take it a bit of detailed modelling to work out how the incidence would ultimately fall. Businesses forced to pay the levy would recover part of it from salaries and part from consumers via higher prices, with shareholders paying the balance. The cost will fall fairlly broadly on the community as a whole, just as it would if it were taxpayer funded.
Therefore, what is interesting from an economic point of view is the insurance aspect — that there would be no connection between what firms pay and whether their female employees take maternity leave. The alternative private-sector funded scheme might have been a compulsory scheme in which each employer pays for its particular employees who took leave. That would have created a disincentive for firms to hire potential new mothers, and Abbott’s scheme avoids this.
At the aggregate societal level, it amounts to subsidisation of working mothers, in the form of six months’ free time, by the rest of the population. I had a go at unpicking the welfare implications a couple of years ago (and Paul Frijters before that), and this seems an apt moment to review the issues briefly.
For women who would otherwise have taken time off unpaid, the scheme is a windfall. For those on low incomes it’s a justifiable income redistribution measure, but for those on average incomes and higher, it’s middle class welfare pure and simple. For the rest, however, the scheme amounts to social engineering, so we need to consider how it will change behaviour and whether there is a net social benefit, given the mildly distortionary effects the levy would have.
Three groups of women benefit. The first is those who planned to have a baby anyway but would otherwise have stayed at work. This is good for their mental health, and the babies benefit from some extra crucial bonding time.The social benefit seems straightforward, but it isn’t clear whether leave on full pay would be necessay to meet the objective in the majority of cases. The $150,000 threshold seems excessive at first blush.
Second, there are women who would not otherwise have had a baby. Presumably the nation benefits from the extra children. But the same effect could probably be acheived with a bigger baby bonus that didn’t discriminate in favour of working women, so, if natural population growth is the main motivation for the scheme, it rests on an implicit assumption that working women raise better young citizens than their non-working counterparts.
Third, there are women who were going to have children anyway but would have stayed out of the workforce in the absence of a paid maternity scheme. Arguably it’s good for them and their chidren to have a closer attachment to the workforce, but the likey affect on their labour market participation, and the number of women involved, would be very hard to quantify.