Down With Paid Sick Leave

Tuesday, April 16, 2013

As I wrote in my Defining Ideas column last week, the condition of the labor markets remains perilous. Even though the nominal jobless rate has declined by a tenth of a percent, the sharp reduction in labor market participation gives a clear indication of the ever-decreasing fraction of Americans who are able to find steady work. My recommendation was, and is, that the only way to revive these markets is to remove the barriers to entry created by government regulation.

Today’s army of activist groups is not focused on restoring jobs, however. The hot-ticket item in the current labor market disputes is legislative mandates for paid sick leave. The unintended consequence of paid-sick leave legislation, whether in New York City or elsewhere, will be to block the creation of new jobs by limiting the deals that employers and employees are lawfully allowed to make with each other.

Proponents of paid sick leave argue that a worker of marginal means should never be put into a position whereby he can only take care of himself or his family by risking the loss of a day’s wages or indeed his job. This theme resonates with politicians. Connecticut’s paid sick leave statute has been in place since January 1, 2012, and it now looks as though the New York City Council will overcome the sensible resistance of Mayor Michael Bloomberg to enact a program of its own, which would cover perhaps a million New York City workers.

Illustration by Barbara Kelley

These statutes enjoy widespread popular support across all demographic groups, which is why multiple efforts are now afoot to introduce similar legislation at the national level. Needless to say, employer groups have fought this legislation at every turn, but they are outgunned and outnumbered by their activist and union opponents.

The Hidden Costs of Paid Sick Leave

The proponents of the legislation should take the fierce resistance of employer groups as a warning signal. Remember, it takes two sides to make a contract. Good policies satisfy both sides to the bargain. Only where there are mutual gains from trade is the deal stable for both sides.

There are many good reasons why sensible employers might offer paid or unpaid sick leave to some or all of their employees: generating loyalty or increasing productivity, for example. But it would be a major policy mistake to insist that just because some employers offer these benefit packages, a large number of other employers should be required to do so as well, even when it makes no economic sense for latter group.

Nonetheless, the supporters of paid family leave ignore several key complications. First, some employers may not have the internal administrative capabilities to meet the requirements of these programs. The sponsors of the legislation, however, seek to meet that objection by creating different tiers of employers, each with different sets of requirements. New York City’s proposed law, for example, covers only those firms with more than fifteen workers; the Connecticut statute covers only those with more than fifty.

But these numerical divisions are fraught with peril. One recurring problem is that someone has to decide, on a specific day, how many employees are in the firm in order to determine whether the firm is covered by the paid sick leave act—an innocuous requirement that is hard to resolve for firms that are expanding or contracting, or which rely on temporary or part-time workers for their busy seasons. Nor is it wise to enact a statute that imposes an implicit, stiff tax on the expansion of smaller firms that might otherwise choose to hire more permanent employees.

The coverage issues are even more complicated because it is not clear that the protection in question should extend to all types of employees and employers. The Connecticut statute contains complex formulas that exempt some employers, such as those dealing with education, from these requirements, even though the ostensible needs of their employees is as great as those of other employers. Connecticut also has a long list indicating the various occupations that are covered by the statute, which of course creates added compliance and enforcement burdens.

Second, the anticipated dislocations of the new legislation could differ across firms, given differences in the composition of the workforce. More specifically, in many seasonal businesses, workers could time their paid sick days to coincide with their heaviest work periods. Employees are thus left paying average wages for less than average amounts of work.

Retail businesses typically are busiest in November and December. It would be devastating for employers if their workers concentrated their sick leaves during that demanding period when employers need them most, and when the cost of hiring part-time workers is higher than average.

Yet, the legislation does not protect employers against employees who cherry-pick the ideal days on which to call in sick. Once the matter is no longer one of private contract, but of public law, the employer loses the right to unilaterally prevent malingering at peak times. Many employers fear that employees will routinely claim the maximum number of days of paid sick leave, which they are helpless to prevent.

Third, there is no effective mechanism built into the legislation that allows employers to challenge the truthfulness of malingerers. Indeed, the fine print of the statute cuts in the opposite direction. Thus, the Connecticut legislation contains a provision that guards against any “retaliatory personnel action.” That fine piece of bureaucratese covers “any termination, suspension, constructive discharge, demotion, unfavorable reassignment, refusal to promote, disciplinary action or other adverse employment action taken by an employer against an employee or a service worker.”

This long list of potential responses is intended to guard against evasive maneuvers by employers to undermine these statutory claims. If push comes to shove, the matter can also be referred to the state’s Labor Commissioner who is given the power to impose statutory fines on the offending employer as well as ordering “all appropriate relief”—including back-pay, reinstatement, and the restoration of job benefits, including lost days of paid sick leave—to the employee.

The fly in the ointment is this: Both employers and employees can be guilty of abuse, but the effort to control employer abuse multiplies the risk of employee abuse. Healthy employees could begin to treat the statutory maximum number of sick days as simply an entitlement to that amount of paid leave. The danger of this is much greater in fields where the reputational costs to malingering workers will be low, which could easily become the case in many firms given these extensive job security protections.

A Stalled Labor Market = A Stalled Economy

These complications are given short shrift in the national debate over paid sick leave. Proponents of mandatory sick leave are quick to trumpet its supposed benefits, but are utterly oblivious of its long-term costs.

For instance, the Institute for Women’s Policy Research is in favor of paid sick leave, arguing that it will stem the wave of infections that arise when sick employees come to work and infect others. No one doubts that this is a serious problem, but it is at least open to debate whether the supposed remedy fits the diagnosis.

In the short run, it is more important for employers to be given the strong right to exclude workers from the workplace. Employers have every incentive to make the right calls on whether to keep people at work or send them home, because they and other employees will surely lose if that contagion risk materializes. But, at the same time, the risk of infection will increase, at least at the margin, if workers are, by legislation, insulated in part from the consequences of those losses.

The point, therefore, does not make the case for further regulation. Rather, it speaks to letting employers have a greater say in the kinds of steps that they can require workers to take in order to keep their jobs, including the right to dock pay or impose other sanctions on employees who increase the risk of infection at the office.

If the putative benefits of paid sick leave are overstated, its proponents will fail to recognize any of the long-term economic dislocations it will cause. Consider: For current workers, the legislation in question does not guarantee that any jobs will be kept; it only provides that all workers within specialized classes receive the stated benefits.

At that point, employers still have options that are costly for them, but ruinous for employees. One such option is to lower wages (or not to raise them) in order to cover the increased costs of the program. Yet the impact on wages is left unmentioned by supporters of the legislation. But the problem is real and it is only made worse at the bottom end of the labor force by the presence of a minimum wage law that could easily block some needed wage adjustments.

Without these wage adjustments, it becomes ever more likely that hard-pressed firms will have to reduce their workforce or shift all or part of their operations to states or locales that do not have these laws in place. The shifts in question will not occur all at once or in dramatic fashion. Many larger employers conduct their operations in different locations, in part to allow them to diversify against such government misbehavior. If they decide to contract operations in one location, and to expand them in others, employees who today worry about paid sick leave days may be faced with the more harrowing choice of having to move in order to continue working for their current firms.

Still greater impact can be expected on the creation of new firms or the expansion of old ones. New firms are more likely to enter locations that are not top-heavy with employment regulations. Yet no set of penalties, however ingenious or comprehensive, can latch on to businesses that have never surfaced within the jurisdiction at all.

It is striking that not a single sentence of the literature defending paid sick leave addresses any of these costs. Instead, the sole emphasis is on the stated benefits of the program—which, if realized, cannot be denied. But this one-sided discourse will never generate the right result. This is one reason to expect that, once these statutes are passed, and it is discovered that the legislation delivers more pain than benefit, the giddiness surrounding the passage will quickly die down.

The irony is that the systematic failure to understand the long-term consequences of such labor regulations will lead to clarion calls for further regulation. At that point, the law of unintended consequences will take its toll once again. We can expect this downward cycle to lengthen what has been an all too slow jobs recovery.