Wednesday, September 12, 2012
Interview on Fox 35 about Mandatory Paid Sick Leave
As readers of this blog know, I authored a briefing paper concerning a proposal requiring mandatory paid sick leave in Orange County, Florida. In recent days, I've written quite a few blog posts about the topic. Why? Sometimes one's words and actions aren't reported in an unbiased manner in the print media (I won't go further into that). Fortunately, there are alternative sources of media including blogs and television. For those who are interested, here's a link to my interview on Fox 35 (it took place in the morning of September 11, before the Orange County Commission tabled the proposal at a meeting later that day).
Sunday, September 9, 2012
Impact of Mandatory Paid Sick Leave on Employers and Employees
While some of the potential costs and benefits of mandatory paid sick leave are discussed in other posts, this one will consider other ways in which employers and employees may be affected. The Institute for Women's Policy Research (IWPR) conducted a study of the mandatory paid sick leave program in San Francisco which reports that a small percentage of firms were adversely affected in various ways. However, it is also reported that two-thirds of firms did not have to make any changes to their existing policy. Given that the mandate should have little impact on these firms, it seems to make sense to focus on the firms that did have to make changes. For example, 70.6% of firms reported that their profits remained about the same. Since 2/3 of firms did not have to make any changes, of course there profits remained about the same. Once one focuses on the 1/3 of firms that did have to make changes, 65.4% of firms affected reported reduced profitability. Similarly, 43% of employees experienced reductions in other forms of compensation. When one adjusts the impact of the San Francisco program to reflect the industrial composition of Orange County, it is found that 54% of firms affected (those that need to make changes to their paid sick leave policy) are likely to experience a noticeable reduction in profits while 40% of employees that are not currently provided with paid sick leave will incur some reduction in other forms of compensation or reduced hours as a result of mandatory paid sick leave. Clearly, based on IWPR's review of San Francisco's experience, this will have a significant impact on employers and employees in Orange County.
What size firms will be most affected? It should not be a surprise to learn that large corporations are much more likely to halready ave paid sick leave plans. According to the latest available figures from the Bureau of Labor Statistics, 82% of firms with 500 or more employees offer paid sick leave as do 66% of firms with between 100 and 500 employees, 55% of those between 50 and 100, and 50% of firms with fewer than 50 employees (all the figures apply to firms in the private sector). Thus, most of the firms impacted by mandated paid sick leave will be small businesses.
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What size firms will be most affected? It should not be a surprise to learn that large corporations are much more likely to halready ave paid sick leave plans. According to the latest available figures from the Bureau of Labor Statistics, 82% of firms with 500 or more employees offer paid sick leave as do 66% of firms with between 100 and 500 employees, 55% of those between 50 and 100, and 50% of firms with fewer than 50 employees (all the figures apply to firms in the private sector). Thus, most of the firms impacted by mandated paid sick leave will be small businesses.
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Benefits of Mandatory Paid Sick Leave
This is part of a series of posts on the proposal to require paid sick leave in Orange County. Supporters of mandating paid sick leave cite a variety of benefits including reducing "presenteeism," fewer trips to the emergency room, and savings from reduced worker turnover. Let's look at the evidence presented for each.
Presenteeism is the act of attending work while sick. As a result, others are made sick. The argument is that requiring companies to provide paid sick leave would reduce presenteeism, thus providing significant savings by limiting the spread of disease. Unfortunately, there are few studies of the impact of mandatory paid sick leave ordinances on presenteeism, in part because so few locales have implemented such a requirement. In a study of the San Francisco program, a survey indicated that 3.3% of companies reported reduced presenteeism as a result of the mandatory paid sick leave ordinance while 3.4% reported an increase, thus indicating little net effect on presenteeism. Who conducted that study? It can be found in appendix table 4 in a study called "San Francisco's Paid Sick Leave Ordinance: Outcomes for Employers and Employees" by the Institute for Women's Policy Research (a leading proponent of requiring paid sick leave).
Another reported benefit involves fewer trips to the emergency room, which results in significant savings to the community. A study used to support this conclusion is "Paid Sick Days and Health: Cost Savings from Reduced ER Visits," self-published by the Institute for Women's Policy Research. However, the statistical results shown in table C3 on page 27 of the study indicate that paid sick leave does not have a significant effect on ER visits. Thus, research by a group that supports mandatory paid sick leave finds no statistical link between mandatory paid sick leave and ER visits.
The major source of savings/benefits is considered to be reduced employee turnover. Why may this occur? Worker loyalty will improve as companies provide paid sick leave, thus causing workers to be more likely to remain with their current employer, helping the company avoid the need to hire and train new workers. Though this may be true for companies that voluntarilty provide paid sick leave, there is question as to whether this would also be true for businesses that are required to provide paid sick leave. Why would an employee be more loyal if they know that the company was forced to do it? Also, if most other companies in the county had to provide paid sick leave (all but firms with fewer than 15 employees), why be loyal to one company when the same benefit is provided by businesses throughout the county. Finally, the savings from any reduction in employee turnover are likely to differ significantly across industries. Many of the firms that currently do not provide paid sick leave tend to employ low-skilled workers. Savings from not having to hire and train new low-skilled workers are likely to be relatively small. Thus, requiring paid sick leave is unlikely to significantly reduce employee turnover and any savings that do result are likely to be small.
Does that mean there are no benefits from requiring paid sick leave? Not quite. Some people may benefit. However, most of the benefits suggested by the Institute for Women's Policy Research study are unlikely to materialize.
Click here to return to the main post.
Presenteeism is the act of attending work while sick. As a result, others are made sick. The argument is that requiring companies to provide paid sick leave would reduce presenteeism, thus providing significant savings by limiting the spread of disease. Unfortunately, there are few studies of the impact of mandatory paid sick leave ordinances on presenteeism, in part because so few locales have implemented such a requirement. In a study of the San Francisco program, a survey indicated that 3.3% of companies reported reduced presenteeism as a result of the mandatory paid sick leave ordinance while 3.4% reported an increase, thus indicating little net effect on presenteeism. Who conducted that study? It can be found in appendix table 4 in a study called "San Francisco's Paid Sick Leave Ordinance: Outcomes for Employers and Employees" by the Institute for Women's Policy Research (a leading proponent of requiring paid sick leave).
Another reported benefit involves fewer trips to the emergency room, which results in significant savings to the community. A study used to support this conclusion is "Paid Sick Days and Health: Cost Savings from Reduced ER Visits," self-published by the Institute for Women's Policy Research. However, the statistical results shown in table C3 on page 27 of the study indicate that paid sick leave does not have a significant effect on ER visits. Thus, research by a group that supports mandatory paid sick leave finds no statistical link between mandatory paid sick leave and ER visits.
The major source of savings/benefits is considered to be reduced employee turnover. Why may this occur? Worker loyalty will improve as companies provide paid sick leave, thus causing workers to be more likely to remain with their current employer, helping the company avoid the need to hire and train new workers. Though this may be true for companies that voluntarilty provide paid sick leave, there is question as to whether this would also be true for businesses that are required to provide paid sick leave. Why would an employee be more loyal if they know that the company was forced to do it? Also, if most other companies in the county had to provide paid sick leave (all but firms with fewer than 15 employees), why be loyal to one company when the same benefit is provided by businesses throughout the county. Finally, the savings from any reduction in employee turnover are likely to differ significantly across industries. Many of the firms that currently do not provide paid sick leave tend to employ low-skilled workers. Savings from not having to hire and train new low-skilled workers are likely to be relatively small. Thus, requiring paid sick leave is unlikely to significantly reduce employee turnover and any savings that do result are likely to be small.
Does that mean there are no benefits from requiring paid sick leave? Not quite. Some people may benefit. However, most of the benefits suggested by the Institute for Women's Policy Research study are unlikely to materialize.
Click here to return to the main post.
The Costs of Mandatory Paid Sick Leave
As with any program, there will be costs involved with requiring companies to provide paid sick leave. Rather than getting bogged down in the details (you can read the report for a blow-by-blow account), let me discuss the approach taken. Most of it is pretty straightforward.
First, you need to estimate how many employees are not currently provided paid sick leave. How is that done? There are estimates of those without paid sick leave by industry nationally; take those numbers and apply them to the industrial make-up of Orange County.
Next, use an estimate of the number of sick days actually used. A Bureau of Labor Statistics (BLS) report from Feb 2012 (an objective source) states that the average worker takes four sick days per year, so that was the number used. This approach is in line with previous studies that are publicly available (i.e., assuming the same usage of paid sick days across industries). Later, it was found that the BLS report also reported usage of paid sick days by industry, so an alternative estimate was calculed. This provides an estimate of paid sick days (and thus hours) used by industry. This resulted in a somewhat smaller estimated cost, so why use it? To be as objective as possible.
Next, it was time to multiply the hours of paid sick leave by the average wage per hour by industry using offical data from the Florida Deoartment of Economic Opportunity. Besides wages, businesses also pay payroll taxes, workmen's comp, and fringe benefits. In addition, they also will face costs in terms of administering the program. Rather than using my own estimate of all of these costs, I decided to use the one provided by the Institutie of Women's Policy Research (23% of the payroll, see report for source).
Finally, companies are likely to need to hire replacement workers or have other employees work overtime when people take paid sick leave. How often would this occur? This is where I could assume it occurred all the time, but instead assumed 10% of the time. Why? A IWPR study of the San Franscisco program stated that 9 out of 10 firms reported that they rarely or never hired replacements. One can argue that they may have had to pay existing workers overtime,etc., so why not use a higher estimate? A somewhat higher figure was easy to justify, but a specific number would be hard to justify. Using an estimate of replacement workers from a proponent of mandatory paid sick leave makes it much easy to defend.
At this point, we have an estimate of the cost if all those currently without paid sick leave are covered by the proposal, but IWPR states that only 42% of those currently without paid sick leave in Orange County will gain access to paid sick leave under the proposal, so the estimated cost was reduced accordingly resulting in an estimated cost of $69.2 million per year if one uses BLS estimates of paid sick leave by industry or $82.3 million per year if one uses the BLS estimate of four days of paid sick leave used per worker.
Given that this study relied mainly on the approach used by IWPR, including estimates of costs, and used official government data that are publicly available, it's hard to claim that the costs were inflated. In fact, they were underestimated. In what way? The figures presented don't include the administrative costs faced by those firms that already provide paid sick leave and must now show that they are in compliance nor the adminstrative costs of those that may need to demonstrate that they are not required to provide paid sick leave. In addition, since it uses the latest publicly available employment data for the county, it assumes no job growth. Assuming that the economy does add jobs, the costs to businesses will increase. Thus, the cost is likely to be higher than the estimates suggest.
Click here to return to the main post.
First, you need to estimate how many employees are not currently provided paid sick leave. How is that done? There are estimates of those without paid sick leave by industry nationally; take those numbers and apply them to the industrial make-up of Orange County.
Next, use an estimate of the number of sick days actually used. A Bureau of Labor Statistics (BLS) report from Feb 2012 (an objective source) states that the average worker takes four sick days per year, so that was the number used. This approach is in line with previous studies that are publicly available (i.e., assuming the same usage of paid sick days across industries). Later, it was found that the BLS report also reported usage of paid sick days by industry, so an alternative estimate was calculed. This provides an estimate of paid sick days (and thus hours) used by industry. This resulted in a somewhat smaller estimated cost, so why use it? To be as objective as possible.
Next, it was time to multiply the hours of paid sick leave by the average wage per hour by industry using offical data from the Florida Deoartment of Economic Opportunity. Besides wages, businesses also pay payroll taxes, workmen's comp, and fringe benefits. In addition, they also will face costs in terms of administering the program. Rather than using my own estimate of all of these costs, I decided to use the one provided by the Institutie of Women's Policy Research (23% of the payroll, see report for source).
Finally, companies are likely to need to hire replacement workers or have other employees work overtime when people take paid sick leave. How often would this occur? This is where I could assume it occurred all the time, but instead assumed 10% of the time. Why? A IWPR study of the San Franscisco program stated that 9 out of 10 firms reported that they rarely or never hired replacements. One can argue that they may have had to pay existing workers overtime,etc., so why not use a higher estimate? A somewhat higher figure was easy to justify, but a specific number would be hard to justify. Using an estimate of replacement workers from a proponent of mandatory paid sick leave makes it much easy to defend.
At this point, we have an estimate of the cost if all those currently without paid sick leave are covered by the proposal, but IWPR states that only 42% of those currently without paid sick leave in Orange County will gain access to paid sick leave under the proposal, so the estimated cost was reduced accordingly resulting in an estimated cost of $69.2 million per year if one uses BLS estimates of paid sick leave by industry or $82.3 million per year if one uses the BLS estimate of four days of paid sick leave used per worker.
Given that this study relied mainly on the approach used by IWPR, including estimates of costs, and used official government data that are publicly available, it's hard to claim that the costs were inflated. In fact, they were underestimated. In what way? The figures presented don't include the administrative costs faced by those firms that already provide paid sick leave and must now show that they are in compliance nor the adminstrative costs of those that may need to demonstrate that they are not required to provide paid sick leave. In addition, since it uses the latest publicly available employment data for the county, it assumes no job growth. Assuming that the economy does add jobs, the costs to businesses will increase. Thus, the cost is likely to be higher than the estimates suggest.
Click here to return to the main post.
Mandatory Paid Sick Leave in Orange County?
Some of you may have noticed an article in the Orlando Sentinel (Sep 8) about a study I authored regarding a ballot proposal that would require all businesses in Orange County with 15 or more employees to provide paid sick leave. Given the title of my blog, Objective Economic Analysis, you may ask, "How can you author a study that takes sides on a controversial issue?" Though there's too much to discuss in one blog post, I plan to discuss the issues involved with requiring paid sick leave in a series of posts. For those that want to go straight to the details, click on one of the following choices:
Enough background! Here are the key findings. Requiring paid sick leave in Orange County is estimated to cost businesses between $69.2 million and $82.3 million per year. Why a range? Details are provided in another post (see the link to the discussion of estimated costs), but basically I originally followed the approach used by IWPR and others that have studied the issue by assuming that workers in different industries used the same number of paid sick leave days per year. Rather than pick a low number which would minimize the cost or a high number that would amplify the cost, I found an objective source (the Bureau of Labor Statistics) and used their estimate of four days (from a report published in February 2012; I even spoke with the author of the report). At the last minute, someone pointed out to me that more detailed estimates by industry were available. Though other studies didn't use that approach, I wanted to be as objective as possible and did a second estimate using BLS estimates of the usage of paid sick leave by industry (the biggest effect came from an estimated usage of two days by workers in leisure and hospitality). This resulted in a slightly lower estimated cost, so why include it? To be objective as possible. The original estimate is easy to defend, but that's not good enough for me.
What about the benefits of paid sick leave? I think the burden of proof is on those advocating a change in policy. Thus, I considered the evidence they used in coming up with their estimated benefits. Unfortunately, the support was quite weak and brought into question much of the benefits. Does that mean that no one will benefit? Some are likely to benefit, but it will be considerably less than estimated by the supporters of mandatory paid sick leave. As discussed in the post discussing costs, this study underestimates the costs of mandatory paid sick leave, so the extra costs not captured by this study are likely to offset most of the benefits.
- the entire report as published
- discussion of the proposed benefits
- discussion of the estimated costs
- impact on employers and employees
- interview on Fox 35
Enough background! Here are the key findings. Requiring paid sick leave in Orange County is estimated to cost businesses between $69.2 million and $82.3 million per year. Why a range? Details are provided in another post (see the link to the discussion of estimated costs), but basically I originally followed the approach used by IWPR and others that have studied the issue by assuming that workers in different industries used the same number of paid sick leave days per year. Rather than pick a low number which would minimize the cost or a high number that would amplify the cost, I found an objective source (the Bureau of Labor Statistics) and used their estimate of four days (from a report published in February 2012; I even spoke with the author of the report). At the last minute, someone pointed out to me that more detailed estimates by industry were available. Though other studies didn't use that approach, I wanted to be as objective as possible and did a second estimate using BLS estimates of the usage of paid sick leave by industry (the biggest effect came from an estimated usage of two days by workers in leisure and hospitality). This resulted in a slightly lower estimated cost, so why include it? To be objective as possible. The original estimate is easy to defend, but that's not good enough for me.
What about the benefits of paid sick leave? I think the burden of proof is on those advocating a change in policy. Thus, I considered the evidence they used in coming up with their estimated benefits. Unfortunately, the support was quite weak and brought into question much of the benefits. Does that mean that no one will benefit? Some are likely to benefit, but it will be considerably less than estimated by the supporters of mandatory paid sick leave. As discussed in the post discussing costs, this study underestimates the costs of mandatory paid sick leave, so the extra costs not captured by this study are likely to offset most of the benefits.
Friday, September 7, 2012
August Job Report
The government released the employment report for August this morning and there was little to cheer about. The headline numbers are the unemployment rate declining to 8.1% and nonfarm payrolls up 96,000 (significantly below the consensus) along with downward revisions to previous months of 41,000 fewer jobs. The details are not good.
Why did the unemployment rate fall? Many more people dropped out of the labor force (gave up looking for work) and thus are no longer counted as unemployed (387,000 men left the labor force). In fact, the labor force participation rate declined to 63.5%, the lowest since September 1981 (which involved a one-month downward blip); the last time it remained around this rate was 1978. Here's a chart going back to 1970:
In addition, the employment-population ratio fell to 58.3%, just 0.1% above its recent low (reached a few times in 2009-2011; see chart below):
The type of jobs being created is also meaningful. Nearly 30% of net job creation took place in food and drinking establishments (up 28,000), not exactly the highest paying jobs. Average hourly earnings declined slightly in August while average weekly earnings are up 38 cents in the last year (rose from $655.20 to $655.58).
By now you may be thinking that there has to be some good news in the report. Let's give it a try. Aggregate hours worked increased slightly. Also, computer systems design & related services added over 10,000 jobs (probably good paying jobs).
What's the primary takeaway? You guessed it; the economy is still moving forward, but remains sluggish. Much of the improvement in the unemployment rate comes from fewer people participating in the job market. How much? The unemployment rate peaked at 10% in October 2009 with a labor force participation rate of 65%. If the labor force participation rate had remained the same, the unemployment rate would have risen to 10.2% instead of declining to 8.1%.
Why did the unemployment rate fall? Many more people dropped out of the labor force (gave up looking for work) and thus are no longer counted as unemployed (387,000 men left the labor force). In fact, the labor force participation rate declined to 63.5%, the lowest since September 1981 (which involved a one-month downward blip); the last time it remained around this rate was 1978. Here's a chart going back to 1970:
In addition, the employment-population ratio fell to 58.3%, just 0.1% above its recent low (reached a few times in 2009-2011; see chart below):
The type of jobs being created is also meaningful. Nearly 30% of net job creation took place in food and drinking establishments (up 28,000), not exactly the highest paying jobs. Average hourly earnings declined slightly in August while average weekly earnings are up 38 cents in the last year (rose from $655.20 to $655.58).
By now you may be thinking that there has to be some good news in the report. Let's give it a try. Aggregate hours worked increased slightly. Also, computer systems design & related services added over 10,000 jobs (probably good paying jobs).
What's the primary takeaway? You guessed it; the economy is still moving forward, but remains sluggish. Much of the improvement in the unemployment rate comes from fewer people participating in the job market. How much? The unemployment rate peaked at 10% in October 2009 with a labor force participation rate of 65%. If the labor force participation rate had remained the same, the unemployment rate would have risen to 10.2% instead of declining to 8.1%.
Wednesday, September 5, 2012
The US and the Global Competitiveness Report
The World Economic Forum released its latest update of the Global Competiveness Report this morning. You may have heard that the US slipped to 7th in the rankings (Switzerland is #1 followed by Singapore). Let's take a quick look at some of the strengths and weaknesses of the US economy based on the report. First, here are the results of a survey of businesses in which they indicate the most problematic factors for doing business:
The US fared better in the other two categories: efficiency enhancers (ranked 2nd) and innovation & sophistication (7). Strengths in terms of efficiency enhancers included domestic market size (#1), redundancy costs (1), tertiary enrollment (2nd), and foreign market size (2). The US was in the top 15 in every component of the innovation/sophistication category led by extent of marketing (3), university-industry collaboration (5), and availability of scientists and engineers (5).
What does the report say about how the US can enhance its competitiveness? It seems that the private sector is doing pretty well, though there's always room for improvement. Clearly, to no one's surprise, the area in need of most improvement involves fiscal policy in general and getting the deficit under control in particular. Though one can debate the specifics, tax reform that eliminates deductions and lowers tax rates can help improve the ranking in terms of tax rates as a percent of profits. Depending on how it's designed, it could also help to reduce the deficit. Entitlement reform and other efforts to reduce the growth of government spending can help remedy the debt-related weaknesses. Basically, the report provides further evidence that policymakers must make serious attempts to reform fiscal policy in order to enhance the competitiveness of the US economy relative to the rest of the world.
- inefficient government bureaucracy, 15%
- tax rates, 14.1%
- tax regulations, 10.8%
- access to financing, 9.5%
The US fared better in the other two categories: efficiency enhancers (ranked 2nd) and innovation & sophistication (7). Strengths in terms of efficiency enhancers included domestic market size (#1), redundancy costs (1), tertiary enrollment (2nd), and foreign market size (2). The US was in the top 15 in every component of the innovation/sophistication category led by extent of marketing (3), university-industry collaboration (5), and availability of scientists and engineers (5).
What does the report say about how the US can enhance its competitiveness? It seems that the private sector is doing pretty well, though there's always room for improvement. Clearly, to no one's surprise, the area in need of most improvement involves fiscal policy in general and getting the deficit under control in particular. Though one can debate the specifics, tax reform that eliminates deductions and lowers tax rates can help improve the ranking in terms of tax rates as a percent of profits. Depending on how it's designed, it could also help to reduce the deficit. Entitlement reform and other efforts to reduce the growth of government spending can help remedy the debt-related weaknesses. Basically, the report provides further evidence that policymakers must make serious attempts to reform fiscal policy in order to enhance the competitiveness of the US economy relative to the rest of the world.
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