Parental Leave in The Age

I have an article in The Age today about the Productivity Commission’s paid parental leave report.

Parental Leave: PC Proposals Fall Short

Joshua Gans, The Age, 6th October, 2008.

MOST of the OECD countries do it. The Federal Government knows that much of the community wants it. And so the Productivity Commission has now recommended that we get it. And with that, the era of paid parental leave in Australia is now in gestation and is likely to be born within nine months.

The PC’s draft report on the subject (released last week) argued for what could only be described as a minimalist approach. It recommends that parents (well, really mothers) who take time off work to care for newborns be entitled to up to 18 weeks of government paid leave at the level of the minimum wage.

It also recommends that employer superannuation contributions continue and that employers be responsible for making the actual payments. But there will be no baby bonus for those families (unless they have multiple births), with that being reserved for those who become parents while not working previously. And with this, the Government can “tick the box” on Organisation for Economic Co-operation and Development standards and move on.

There is something dissatisfying about the PC’s ultimate approach. While the notion of payment at the minimum wage is not controversial, it did highlight potentially different standards for mothers who did and did not work. Those standards are more symbolic than economic once you figure all of the other family payments.

Indeed, I feel for Ian Harper and the Fair Pay Commission, who will now have a new interest group at the table (parents) and have to choose between greater unemployment and child development.

What is more troublesome is that it is unclear what the public is getting for the additional $500 million in expenditure. Having reviewed the evidence, the PC recommended that there was a case for six months parent-exclusive care for infants. This would lead to hard-to-define benefits for the child, from breastfeeding to child development.

I worry that most of those benefits are accrued by the family and, therefore, fall short of an economic case for government subsidy, but the PC was charged with coming up with something. The point here is that if six months is the goal, why recommend a scheme that lasts only 18 weeks?

The problem is that the recommendation might be both too much and too little. It may be too much because at the moment 70% of (previously working) mothers take more than six months leave anyway, so you are paying them all to get the rest to take more leave.

What’s more, half of those already get paid leave from their employers. Thus, there is not much bang for the buck here (we will be lucky to raise average leave taken by more than a month) and at the same time, it is just a subsidy to businesses already paying that leave.

In this respect, it may also be too little. If you really believe in six months leave, then for women who are earning more (perhaps much more) than the minimum wage, this payment is not that much more useful than the baby bonus. It helps with the bills, but fundamentally the incentives are unchanged.

The good news associated with that is that there will not be substantial additional disruption costs on employers.

There are additional reasons to doubt the scheme’s effectiveness relative to a simple, straight-out baby bonus payment. First, women who give birth at different times of the financial year will get different payments net of tax. Give birth in July and don’t return to work that financial year and you get more than if you give birth in March. Second, with an upcoming recession, can we really trust that employers will not target pregnant women with redundancies when faced with an ongoing liability on their books due to superannuation and other payments?

Finally, if the goal is to be transparent about incentives, for low-income households, trading off decisions to work with the myriad of other social security payments for families is complex.

All of this leads me to wonder if it is really worth putting in such an elaborate scheme.

The PC recommendations could have been so much more. For example, there was an excellent proposal by Bruce Chapman (and others) to use income-contingent loans (repaid through the tax system) to supplement the minimal government payments.

It had a clear efficiency rationale (it is hard for families to get loans while off work), was equitable (most of the payment came from families rather than the community), and it was a proven policy tool (any concerns about moral hazard and adverse selection would apply to the HECS scheme in greater intensity but they have not shown themselves).

The PC considered this innovative approach but, in the end, dismissed it as “conceptually elegant” but too complex. Yes, too complex. Given what they have come up with, that is a stretch. What’s more, a supplemental loan scheme would have been a way of encouraging more leave without too much tax on the public purse. It is an opportunity missed. And with that opportunity, the chance of doing something culturally significant on parental leave has been thrown out with the bathwater. This time, according to the PC’s own review, the children will be paying.

Joshua Gans is an economics professor at Melbourne Business School and the author of Parentonomics: An Economist Dad’s Parenting Experiences.

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