Parental Leave in the AFR

In today’s Australian Financial Review, I have an opinion piece (over the fold) on parental leave.

Family policy still in gestation

Joshua Gans
Australian Financial Review, 19th May, 2008

The Budget definitely had Labor’s mark on it. While it was economically conservative, in a marked departure from the previous government, it signalled a reversal of fortunes for those well-off in society. They had delayed tax cuts, higher taxes on luxury cars and their babies would no longer bring a bundle of cash joy. These things are not going to result in any big changes in income inequality but they are symbolic of a change in direction.

But what happens when a desire for efficiency does not square with a desire for fairness? This is an issue that immediately comes up when we consider what the government may do with regard to parental leave. The Productivity Commission (PC) is investigating options right at the moment and it is doing so under pressure that paid maternity and probably paternity leave is being seen internationally as a moral right. Indeed, many of our peer economies have government schemes in place and have hardly suffered economically because of it. But what is the appropriate direction for this policy to go in?

Let’s start with the obvious where efficiency and fairness are not in conflict. When a low-income household has a child, it is not easy to take parental leave without suffering income dislocation. Moreover, it is easy to imagine that, if we believe poverty and child development do not mix, such dislocation would be precisely what we do not want. So, like all other sorts of support for the less well-off, a form of government sourced paid leave is an obvious policy.

However, much of the push for paid parental leave is not targeted at just this. Proponents of a more universal scheme point out that women, in particular, who are on high income career tracks find it difficult to balance work and home lives. Indeed, it is the loss of that high income that is a large deterrent in their taking leave. If parental involvement is good for child development, that applies to all parents.

Here, incentives and fairness do collide. To create an incentive for the more well-off to take parental leave requires more dollars. And those dollars need to come from somewhere. Take them from their employers and you risk them being employed at all. Take them from the government and it is easy to image that the rich are being disproportionately favoured.

And there is another important wrinkle: the very fact that a woman might be more likely and have greater incentives to take parental leave, only exacerbates the forces that are disadvantaging women in the workplace. Gender discrimination likely arises because employers are not willing to invest in a woman’s career in the same way as a man’s. This generates a pay gap and a career advancement gap.  It shouldn’t be that way, it is inefficient because our best human resources are not being utilised properly and it is more likely to occur when we make it easier for parents to take leave as it is those disruptions that employers fear.

So how do we management the efficiency and fairness conflict in this important area? Well, first, we recognise that income loss during leave is mostly temporary and not life-long. The government could provide paid parental leave as a loan rather than a grant to make up for this loss. Then it could be paid back through the tax system just as we do with higher education fees. ANU’s Bruce Chapman and his colleagues have proposed this to the PC. There would be no regressiveness as individuals pay for their own benefits. And it would make it easier to take leave.

But what of discrimination? At the heart of this is a workplace culture that fears temporary or medium-term absences and employees with a family life focus. This is particularly the case for high track careers. Thus, the appropriate policy targets to address these are not parents but their employers. What I have proposed to the PC is that the government offer tax credits for the pay of employers who take parental leave and then successfully return to work for a significant period (at least 6 months).

Think of what this would do. First, it would create incentives for employers to re-integrate parent-employees who have had children. Second, it would create incentives for employers to encourage higher paid employees to actually take such leave (and that includes fathers as well as mothers). And that may mean that they pass on the tax savings to pay employees while on leave. Finally, by mitigating the costs and disruptions to employers from leave, it will unravel the forces that generate discriminatory outcomes in our workplaces. Now that would be something that would boost productivity.

Efficiency and fairness can mix but it is critical that we consider the economic forces as well and not just react to social rhetoric.

Joshua Gans is an economics professor at Melbourne Business School. His book, Parentonomics, will be in bookstores in August.

5 thoughts on “Parental Leave in the AFR”

  1. Why not give the child the money and let them decide whether to pay a stay at home parent to look after them or to spend their money on day care or let them save the money for later use at preschool or University?

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  2. The HECS idea is good one. It is also a sound risk loan for the government – you lend say 6 months of the salary that the person averaged over the previous tax year, in the expectation that they can obtain that salary again in the future.

    I am not clear where the market failure is when employers hire and fire so as to avoid nterrupted careers. Surely it is at least possible that those who do not take leave and put their children second actually do perform better at work. So the employers are acting rationally and, to the extent that the decision is efficiency based, fairly.

    If this were the case, then any intervention would have to be based explicitly on the idea that children need dedicated length contact with at least one parent. But this is not a proposition that everyone, including many women’s groups, accepts.

    If this were the case, then any intervention would have to be based explicitly on the idea that children need dedicated length contact with at least one parent. But this is not a proposition that everyone, including many womens’ groups, accepts.

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