Consequences of Mayor de Blasio’s Mandated Personal Leave

This week Mayor Bill de Blasio proposed mandating paid personal leave benefits for all employees in New York City. The policy, which applies to both full and part-time workers, would make New York City the first city to mandate personal leave in the country.

The policy is billed as benefiting the 500,000 workers in New York City that currently have no personal days off. Although the idea may sound fresh and New Yorkers no doubt like the sound of paid time off, they may be less enthused if they understood the economics of mandated benefits.

Currently, the Bureau of Labor Statistics estimates that 32 percent of an average U.S. employee’s compensation is in employee benefits, while 68 percent of an average U.S. employee’s total compensation is in salary or wages. So, although most employees don’t realize it, around one-third of employee compensation is already devoted to paying for paid leave and other benefits.

When policymakers mandate benefits for employees, employers typically pay for them through a reduction in salary and wages or other employee benefits. This is because employers are interested in limiting total costs --and therefore total compensation-- for a given productivity level. If a reduction in existing salary, wages, or benefits is not possible (due to minimum wage laws, for example) then employers may try to avoid hiring the type of workers they can’t afford.

In a related example, Illinois, New York, and New Jersey each mandated employers provide maternity benefits to women. As a result, women’s wages were reduced to reflect the cost of mandated maternity benefits. The estimated reduction in wages was around 100 percent of the cost of benefits.

Some employees may willingly accept a reduction in wages or benefits for paid personal time. However, not all employees would. For example, part-time workers that already have flexible schedules may prefer higher wages or other benefits instead of paid personal leave. Counterintuitively, when policymakers like de Blasio mandate benefits, the policy reduces employee choice.