For Better or Worse? The Economic Implications of Paid Sick Leave Mandates

By | February 2, 2022

The United States stands out as one of the few developed countries without a national paid sick leave (PSL) policy. Typically, PSL mandates require firms to provide all workers with PSL benefits, which offer job and wage protection against short-term illnesses. While some people may think of it as a similar federal law, the Family and Medical Leave Act (FMLA) differs substantially and is not a substitute to PSL mandates for a couple of reasons. First, the FMLA is restricted to unpaid leave. The second issue is that just 56% of US workers were eligible for FMLA in 2020. To gain coverage, you need to be a full-time employee, have at least one year of tenure, and work at a firm that has at least 50 employees. Finally, even if you’re covered by the FMLA, it’s not something that you can use if you are sick for a few days with the flu. The FMLA is there specifically for serious and long-term health events.

Why the United States lacks a national paid sick leave policy?     

As of 2013, the start of our sample period, the Bureau of Labor Statistics (BLS) estimates that at least 37% of US private sector workers do not have access to PSL benefits. Reflecting the disparity in access to PSL, most of these workers are low-wage workers. Moreover, compared with other industries, workers in the hospitality and construction sectors are much less likely to have PSL. Highlighting concerns over these statistics, many surveys show that most Americans support having a national PSL policy. However, a federal law mandating PSL has failed to pass repeatedly. One major reason is the uncertainty around the economic implications of such policy, a question we investigate in our recent paper.

The economic implications of mandatory PSL are not a priori obvious. On one hand, PSL mandates should increase compensation costs, which could lead to lower labor demand and, hence, lower employment. On the other hand, however, these mandates may lead to higher employment if their benefits exceed their costs. For example, PSL mandates could decrease labor turnover, increase labor productivity, encourage more workers to supply labor, or have positive spillover effects on local demand.

The positive employment effects of paid sick leave mandates

In the absence of a federal mandate, as of 2019, 11 states and 32 localities have enacted their own legislation requiring that firms provide PSL coverage to all local employees. We investigate the employment effects of these PSL mandates using a difference-in-differences design around the implementation of mandatory PSL legislations. We find that following the implementation of a PSL policy, county-level employment increases by 1.9%, on average.

Consistent with a causal interpretation of our results, we find larger employment effects when the mandate provides more PSL days or in counties where a higher percentage of workers are assumed to not have PSL, prior to the new mandate. We also observe a larger positive employment effect in counties where a higher percentage of the population reports having poor health. Moreover, we explore within-county variation by looking at populations of workers for which a PSL mandate is most likely to be binding. We find that the employment effects are concentrated within low-education workers and construction and hospitality sector workers—workers who are less likely to have access to PSL before the enactment of the legislation.

What’s driving the employment effects?

Several non-mutually exclusive mechanisms can explain our findings. First, we predict that PSL benefits reduce turnover. Dube, Lester, and Reich (2016) show that for a broad class of job ladder models, a shift in compensation leads to a decline in employee turnover. Moreover, employee quits may be even more sensitive to an increase in PSL, relative to other forms of compensation—if employees are more likely to quit or be fired after an illness, in the absence of PSL benefits. Consistent with this argument, Hill (2013), using the Medical Expenditure Panel Survey, finds a 25% lower probability of separation among workers with PSL, after controlling for a large set of job and worker characteristics. We test this prediction and find a 2.5% decrease in the county-level separation rate following the adoption of a PSL mandate. This decrease in the separation rate is most pronounced among workers most likely to be affected by the mandate: low-skill workers and workers who have poor health—a pattern consistent with the heterogeneity in the employment effects.

Second, there are several reasons to expect that productivity increases, potentially impacting labor demand. Assuming workers learn while on-the-job and productivity is increasing in tenure, then lower turnover will increase labor productivity. Alternatively, looking at minimum wages, Coviello, Deserranno, and Persico (2018) find an increase in labor productivity following an increase in compensation and attribute the gains to an efficiency wage argument. Moreover, specific to PSL, Stearns and White (2018)provide results suggesting that workers are less likely to work while sick following the implementation of a PSL mandate, decreasing presenteeism and increasing productivity. Lastly, PSL benefits reduce the probability of suffering from an occupational injury (Asfaw, Pana-Cryan, and Rosa, 2012). Consistent with these results, we find that real Gross Domestic Product per job, a proxy for labor productivity, increases by 1.8% following the implementation of a PSL mandate.

Third, mandatory PSL benefits can also increase the labor supply, thus impacting equilibrium employment, if more individuals are willing to supply labor if provided with PSL benefits. Consistent with this channel, we find that individuals with poor health or young children are more likely to report being employed or looking for a job after these mandates.

Finally, our results could be driven by increases in household income spilling over into the local economy from continuing to receive wages while sick and experiencing less frequent unemployment spells. Consistent with this argument, we observe a 2% increase in household income following the adoption of a PSL mandate, with the gains concentrated among low-income households. Moreover, we find decreases in the percentage of individuals with subprime credit ratings, the percentage of individuals who are living in poverty, the percentage of workers who are without health insurance, the aggregate number of bankruptcy filings, and the income inequality within a county.

Mandatory vs. voluntary paid sick leave

If PSL mandates lead to positive effects on employee retention and productivity, then this begs the question: why do firms not voluntarily adopt these policies in the absence of a mandate? The answer likely lies in adverse selection concerns. Firms may want to offer PSL if all employers in the area were offering PSL. However, if few peer firms offer PSL, then offering PSL benefits can be more costly due to adverse selection. A firm offering PSL where its peer firms do not is more likely to end up employing workers who are more likely to be sick or to abuse the firm’s PSL policy, overwhelming any benefits. Another reason why firms don’t provide voluntary PSL may be related to having imperfect information about the value of PSL benefits. As such, mandatory PSL legislation may be able to achieve benefits not accessible to firms through voluntary actions.

Policy implications

Overall, our results have important implications for the current public debate over the expansion of PSL benefits and the call for a national PSL policy in the US. While PSL mandates come with some costs for employers, the benefits of higher job retention and higher productivity, along with the positive spillover effects on the local economy, could outweigh the costs. However, firms may not be able to realize the same benefits through voluntary actions due to selection concerns.

Turk Al Sabah is a PhD student in Finance at the Kenan-Flagler Business School, University of North Carolina at Chapel Hill.

Paige Ouimet is a Professor of Finance at the Kenan-Flagler Business School, University of North Carolina at Chapel Hill.

This post is adapted from their paper, “For Better or Worse? The Economic Implications of Paid Sick Leave Mandates” available on SSRN.

The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.

Leave a Reply

Your email address will not be published. Required fields are marked *