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Why Our Economy Needs Paid Leave

The President announces several further steps the Administration is taking to help working families. The President is calling on Congress to make paid sick leave available to all workers.

Building on the momentum created by the White House Summit on Working Families, today the President announced additional steps the Administration is taking to help working families. The President is calling on Congress to give millions of workers the chance to earn up to seven days per year of sick time. He is expanding his support of state efforts to provide paid parental leave through a $2.2 billion dollar budget proposal to help states cover the initial costs of state paid leave plans, and by making $1 million in existing funds available to help states and municipalities conduct feasibility studies. 

Finally, he is bringing the federal government’s paid leave policies closer in line with those of industry-leading companies by signing a Presidential Memorandum that will ensure that most federal employees have access to at least 6 weeks of paid sick leave when a new child arrives by allowing new parents to advance sick leave.  He will also propose that Congress pass legislation to provide federal workers with an additional 6 weeks of paid maternity and paternity leave following the introduction of a new child into the home.

The steps the Administration is taking to move forward in increasing access to paid sick and family leave are important not just for workers, but for our overall economy, an argument that we lay out in a report on the economics of paid leave. Since paid leave is nearly universal across the developing world, and many countries have expanded access to paid leave over the past 30 years, we have good evidence concerning its effects. And study after study finds that family-friendly policies like paid leave are beneficial for children, workers, and employers. These studies find that paid parental leave improves infant health and cognitive development, even increasing children’s earnings in adulthood.[1] Growing evidence also shows that these policies benefit employers and employees by increasing employees’ productivity, reducing turnover, and minimizing the loss of firm-specific skills and human capital. In addition, these policies have broader positive economic effects, such as helping to boost labor force participation.

Paid sick leave creates a healthier work environment and helps prevent further productivity losses, since sick workers who stay at home are less likely to infect their co-workers. For example, a recent study showed that employee absences fell more rapidly after the peak of the 2009 H1N1 pandemic among public sector workers, who had much higher access to paid sick leave, compared to private sector workers.

Paid leave can also help reduce worker turnover. In a survey of 120 randomly selected employers in New York, employers that offered sick leave and child care assistance had significantly lower rates of turnover. Paid family leave in particular can help businesses retain talented workers after childbirth. Studies show that paid maternity leave increases the likelihood that mothers return to their employers following the birth of a child. Particularly when combined with statutory job protection, paid leave can increase mothers’ wages and employment in the long-run. The link between paid leave and returns-to-work among mothers is found even when countries are expanding already very generous leave periods.

Perhaps because of these benefits to employers, evidence suggests that, on net, providing paid leave does not cut into business profits. A 2010 survey of 253 employers affected by California’s paid family leave initiative found that over 90 percent reported no negative effect on profitability, turnover, or morale. 87 percent reported no cost increases associated with the program, and 9 percent reported cost savings. Another study examining the implementation of San Francisco’s paid sick leave law in 2007 found no evidence of a negative economic effect. Relative to surrounding areas that did not have a paid sick leave law, total employment and the number of businesses in San Francisco increased after the law’s implementation.

In fact, research finds that businesses that have adopted paid leave policies have seen positive results. A study of over 700 firms found that firms with work-life balance policies in place also had higher productivity. Another study showed that after Fortune 500 firms announced the adoption of new family friendly policies such as dependent care and flexible work arrangements, their stock prices rose (0.36 percent), indicating that investors too have discovered that such policies can boost productivity.

While many workers in the United States still lack access to any kind of paid leave, momentum is building at both the state and city level to guarantee the right to earn paid leave. California, New Jersey, and Rhode Island all provide four to six weeks of paid family leave, financed through their Temporary Disability Insurance programs. In recent years, states have also moved towards implementing paid sick leave as well. In 2012, Connecticut implemented legislation that requires certain employers with at least 50 employees to offer paid sick leave to hourly (non-exempt) workers in the service sector. The Council of Economic Advisers estimates that Connecticut’s legislation raised the share of workers in that state with paid sick leave to 78 percent, compared to an average of 63 percent across New England. In September 2014, the California legislature passed paid sick leave legislation requiring all California employers to provide one hour of sick leave for every 30 hours worked starting July 1, 2015. In November 2014, Massachusetts voters overwhelmingly voted to require employers with at least 11 employees to offer paid sick leave. The Council of Economic Advisers estimates that, as of May 2015 when the initiative becomes effective, approximately 90 percent of Massachusetts employees will have access to paid sick leave.

Cities across the country have also enacted statutes providing covered employees with the opportunity to accrue paid sick leave. These include San Francisco, Oakland, the District of Columbia, Seattle, Portland, New York City, Jersey City, and Newark. In addition, there are active campaigns in around 20 other states and cities to make paid sick leave mandatory. However, at least 10 states have laws in place that prohibit cities and counties from passing their own paid sick leave legislation. This suggests the need for action at the federal level, so that all Americans have access to the same basic paid leave benefits.

Providing access to paid sick and family leave has a larger positive impact on the economy as a whole than its positive impact on any single business. When an employee comes to work sick and passes his or her illness on to a customer, this hurts the productivity of other families and businesses. When a woman drops out of the labor force because she cannot take paid time off for the birth of a child, it not only harms her employer, it is bad for the economy to lose her talents. For these and other reasons, we need to follow the lead of other industrialized countries and ensure that all workers have these basic protections.

Jason Furman is Chairman of the Council of Economic Advisers. Betsey Stevenson is a member of the Council of Economic Advisers.

[1] See Rossin-Slater (2011) and Ruhm (2010) for research referring to decreases in infant mortality after the passage of paid leave, since parents are better able to monitor their children’s health; Roe et al (1999) and Baker and Milligan (2008) for evidence that paid leave increases the likelihood of breastfeeding; Heymann (2001) for shorter hospital stays; and cognitive benefits (Carneiro, Loken, and Salvanes (2011)).