Parental Support: The Elusive Policy

To recap, the goal of parental support policies is the ability to move between work and home life frictionlessly. However, in evaluating whether the market is failing in this area points to possible problems to do with the indivisibility of work life, externalities associated with child development, discrimination and liquidity constraints. To be sure, when a person has lots of bargaining power (as much arise when there are skill shortages), firms will have an incentive to address parental support issues in order to retain those people. Thus, there exist many jobs out there for which parents’ desires are being met but for possible discrimination that might still be present.

And before I move on to various policies in this space, let me clarify one thing about indivisibility. It is not just work that has this but home too. For starters, there is work at home. Having kids increases the amount of housework to be done. And much of the stuff from washing, cooking to chauffeuring can be outsourced but, once you are taking care of the kids anyhow, may be difficult to justify or afford when one parent is away from (paid) work.

Because the PC inquiry is about parental leave support and not other forms of parental support, I am going to focus on that. However, as will become clear, the system of policies matters alot and I will touch on that where necessary.

The Current Policy

What Australia has at the moment is mandated unpaid parental leave for up to 12 months. It isn’t available to everyone (e.g., the self-employed and those who have not been in their job long enough) but it does give a right to return to work at roughly the same position you left. And it is available for one of the parents.

This mandate increases the incentive to take parental leave by removing one barrier: the ability to return to one’s job. To that extent, it serves to hit the indivisibility issue and any externalities associated with child development.

It is chiefly criticised because it doesn’t deal with liquidity constraints and so there is a muted incentive to take leave because it is unpaid — something that some employers negotiate away.

But there is another problem: it increases discrimination towards those who are statistically or have revealed themselves to have a preference to actually take that leave. This is because employers face costs of temporary worker turnover (more likely to be an issue for smaller than larger firms) and so, in choosing which workers to hire, promote and train, there will be a commercial bias towards the non-family oriented. Moreover, to the extent that women are identified as most likely to be family-oriented, this mandate will disadvantage them relative to men in the labour market.

Paid Parental Leave

To alleviate liquidity constraints, like many other countries have done — at least to some extent — there are calls for paid parental leave. The pay may be for some fraction of the parent’s income and for a certain period of time.

Issue No.1 is, of course, the obvious. Mandate paid leave and require employers to pay, like we do for annual leave, and this creates a disincentive to hire workers likely to take that leave. So the rationale is for any paid leave to be funded by government.

Issue No.2 is that another government entitlement that involves a private benefit accrued by some people means a cross-subsidy from those not receiving the benefit. To be clear, we have all sorts of things that involve this type of cross-subsidy. But most of them can be rationalised on the basis of social risk bearing, e.g., I don’t know if it is me or you who will be disabled or unemployed, so we agree before the fact to a payment from the winner to the loser in the game of life. The decision to have children is under the control of parents and cannot be characterised as a clear-cut losing proposition in any case. So on a social contracting basis, there is no rationale for a cross-subsidy.

[That said, when you have a child, your costs of living goes up. So to the extent that there is social security, there is an incentive for greater payments to low income households for social insurance reasons. Targeting paid parental leave on the basis of income — say, by capping it at the minimum wage — has a strong case. Indeed, to have unemployment benefits available for unemployment but not for parental leave seems inconsistent.]

Thus, we must move on to the externality issue. We might be concerned that too few parents are taking the requisite time during the first six months to take care of their babies. Again, this has to be relative to the child care option, as we are targeting a parent’s role here. This brings us to issues of breastfeeding (for which there are technological things that can assist) and bonding (which involves both parents). Reducing the income cost associated with exercising parental leave options will either mean (a) more parents will take leave or (b) employers will pay parents more not to take leave. But let’s be clear, only (a) reduces the externality.

The issue is with (b). Offer parents only a fraction of their wage, paid by government, and there is less chance the leave will be taken. Hence, the push for a larger fraction to be paid. But doing this raises the set of issues I talked about earlier in the week (mostly to do with parents delaying childbirth to gain a greater subsidy — something that does not seem desirable and does not seem like it will help employers). Now we can solve this by capping total pay that can be made but this will mean that some parents will not take leave (but let’s face it, taking all child development opportunities as equal, the cheaper parents — i.e., low wage employed — to engage in near-birth parental leaves are the best ones to fund).

But we can’t get around the discrimination issue: the greater the ability and the incentive to take parental leave, the greater the costs on employers from temporary replacement of the employee and the greater the level of discrimination that will be observed.

Income-Contingent Loans

The cross-subsidy issue can be removed while solving the liquidity issue by using income-contingent loans. (Bruce Chapman is working on precisely this policy option at the moment). Like higher education, there may be an externality associated with child development. But like higher education, the benefits are largely retained by the family (or child). In this regard, parental leave is an investment and one that might be difficult to undertake because of liquidity constraints. Rather than simply paying for that leave, the government would extend a line of credit to parents taking that leave which they then pay back when they return to work. Of course, to get the incentives right it needs to be a household based loan but having it there gives incentives for both parents to take leave. Thus, it is both efficient — in that it encourages parental leave — and it is equitable — in that there is no significant cross-subsidy associated with it.

Of course, it continues to suffer from the same discrimination possibilities associated with any scheme that creates an incentive to take leave — although in this case it is a muted incentive given that it is a loan rather than a payment.

Paying the Employers

The above discussion suggests that there is a fundamental conflict between policies that create an incentive to exercise parental leave opportunities and discrimination in terms of employers having incentives to favour employees who are less likely to exercise that option.

So what if, instead of paying the employees who take leave, we paid the employers who let them take leave? Imagine that an employer has a employee who takes up to 6 months of leave. Then, when that employee returns to work, the firm receives a 175% – 200% tax credit on the pay of that employee over the next six months of work (or 12 months if it is a part-time return).

What would this do? First, it would create an incentive for employers to get employees back to work following parental leave and to give them the employment conditions that would make it happen. Second, it would create an incentive for employers to encourage their employees to take parental leave. And to the extent that giving them paid parental leave is the way to do that, the employer can transfer the payment from the government to the employee. Third, it would create an incentive for employers to encourage more highly paid employees to take parental leave. So to the extent that it pays men more than women, there is a big incentive to get men to take that leave.

Now this will cost money — as much as a paid parental leave policy. But it won’t do so in a way that creates more potential for discrimination. Indeed, all of the incentives will go the other way. Put simply, this type of policy will subsidise the ability of family-oriented individuals to compete in the labour market.

What is more, I can imagine that, even if we don’t give employees who have been working for a firm for a short period of time a right to parental leave, there is no reason why this payment cannot be made should they be permitted to take and then return to work. That allows labour markets to function more smoothly; something that surely isn’t a bad thing.

A Combination

To conclude, I think we need to consider a combination of policies:

  • Minimum-wage parental leave paid for by the government for one parent: to cover the social security element of having children.
  • Income-contingent loans: to allow parents to take leave and smooth the income shock.
  • Return to work payments to employers: paid by the government to alleviate implicit discrimination and to change the culture of workplaces.

5 thoughts on “Parental Support: The Elusive Policy”

  1. A pretty comprehensive review of some sensible policy options Joshua. Will have to have a sit down and work through these.

    In his submission before the PC hearings, Bruce Chapman indicated that he thought that the only rationale for the government getting involved in this area was the extent to which there were public spillovers from having parents at home during the first few months of a child’s life, and then only pay for those social benefits, not the private benefits that accrue to families.

    I am still not sure I understand why this indivisibility argument is the type of market failure that government should be aiming to correct. Liquidity issues, sure (so we have HECS, and maybe income contingent loans down the track), but I am not sure that indivisibility and timing issues are the purvue of government.

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  2. Indivisibility is the thing that leads to other stuff being an issue. I don’t think the government can actually solve much for this part of child rearing. That said, for older children at school it is another matter but I have set that aside for the moment.

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  3. The return to work payment to employers is an intriguing idea. Needless to say I’m a fan of income contingent loans in this context (having worked with Bruce on this). A consideration that we raised in the PC hearing, albeit briefly, was possible involvement of employers by helping repay (at least partially) the loans of employees on the condition they return to the same workplace. This would provide additional incentive for parents on leave to return to work thus reducing one source of moral hazard.

    When we considered this I wondered whether an argument based on lost returns to training investments was sufficient incentive for some employers to help with repayments. Your tax credit idea offers a nice solution here.

    Moreover, by using tax credits to reduce the debt to the parent, this would return funds back to the government more quickly than otherwise, thereby reducing the size of the loan subsidy. So some of the costs of providing the tax credit would be offset.

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  4. When Bruce considers options he can build any sort of rules he likes into the scheme and know that they can be implemented. The tax office should not be part of any implementation. In other words it is possible to implement any policy and implementation issues should not be a consideration. For example contingent loans may be reduced if the family income is “high” or the contingent loan can be added to a HECS debt or that people with red hair get twice as much.

    The cost of implementation will be the same no matter what the rules and the cost will be low if done appropriately. There is no reason why there cannot be alternatives from which people choose and individuals should be able to suggest variations in the rules. That is the system should be designed for individual and family choice.

    The system should also be designed with inbuilt measures to show that it is “working” and is successful.

    It should be voluntary – that is people need not join because choosing this may influence some other benefit or support in the future and that could be part of the agreement.

    The system could be tied to other community benefits. For example, the loan could be paid with service to a school community (working in the tuck shop) etc.

    By allowing choice and variation then some of the problems associated with indivisibility and timing can be addressed.

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