How paid leave insurance can help economic growth

Today’s Working Families Summit, an event hosted by the White House, the Department of Labor, and the Center for American Progress, will highlight the myriad ways the modern workplace could be reformed to better fit the needs of the 21^st century family. The American workplace was designed in a period when the workforce was primarily male and women were the primary caretakers in the household. Today, the majority of mothers are breadwinners and household work and childcare are more equitably divided.

Public policy can make the tradeoffs between work and family less severe. Specifically, paid family and medical leave insurance would help workers take time off from work to recover from an illness, spend time with a new child, or care for ill family member. This policy would not only help working families but also the broader economy.

The United States is one of the few rich, industrialized countries without a law that allows workers to earn paid time off for family or medical reasons. Currently, the Family and Medical Leave Act allows workers to take time off, but they are not guaranteed paid leave. Many workers can’t afford to take unpaid leave, which effectively denies leave to less-well-off families. Paid family leave insurance would help families afford time off by paying the worker a set percentage of her typical wages.

Helping workers navigate family changes and emergencies sounds like a kindhearted policy, but is it hardheaded? Equitable Growth’s Heather Boushey and Alexandra Mitukiewicz along with the Center for American Progress’s Ann O’Leary looked at the economic consequences of paid family and medical leave insurance. And they found several ways that the program would benefit the economy, particularly economic growth.

One benefit is that leave insurance appears to increase employee retention. Employees with paid leave are more likely to return to their original employer. This workplace continuity reduces employee turnover, which can be very costly. According to one estimate, the median cost of turnover to an employer is 21 percent of an employee’s annual salary.

There are several costs to turnover. First, the employer has to search for a replacement, which takes time and resources. Secondly, once a new employee is hired they have to be trained in the job. Given the particularities of certain jobs, this training can take a while. The cost to the employee here is not only the resources spent on the training but also the lost productivity of the former employee who already had the employer-specific knowledge and skills.

In other words, the increased continuity from leave insurance could boost productivity, the source of long-run economic growth.

Another major benefit of leave insurance in an increased labor force participation rate and work hours. Leave insurance helps keep workers, particularly women, in the labor force. Boushey, O’Leary, and Mitukiewicz cite work by Cornell University economists Francine D. Blau and Lawrence Kahn on the female labor-force participation rate. Blau and Kahn found that the United States had the sixth-highest female participation rate among advanced economies in 1990, but by 2010 that ranking had fallen to 17^th highest. The authors point to the lack of programs such as leave insurance for the difference: the United States lacked them and the other rich economies did not. A higher labor force participation rate boosts the long-run growth potential of the economy.

So leave insurance appears to be both a kindhearted and hardheaded policy. By strengthening families, public policy can help the long-run strength of our economy. Unfortunately, the immediate prospects for enactment of such a program look long at the federal level. States are making headway by passing leave insurance laws. But an issue of this scale requires a national effort.