Public Paid Leave and Private Benefits: Evidence on Crowd-Out and Welfare

• In Event: Paid Leave as Health Policy: Program Design, Uptake, and Health Impacts

Abstract

This paper examines how firms respond to the introduction of state-level paid family and medical leave (PFML) programs in the United States, with a particular focus on whether public provision crowds out employer-provided benefits. Since 2017, several U.S. states have implemented PFML programs financed through payroll taxes, granting private-sector employees access to paid leave for personal illness or family caregiving. Using nationally representative firm-level data from the National Compensation Survey (NCS) spanning 2009-2023, we apply event-study and difference-in-differences methods to estimate causal effects of PFML adoption on employer-provided fringe benefits.

Economic theory predicts that when governments expand publicly provided benefits, firms may reduce voluntarily provided benefits that are close substitutes. Our findings strongly support this crowd-out hypothesis for paid family leave benefits. Following PFML implementation, the share of jobs offering paid family leave declines by approximately five percentage points, paid personal leave by seven percentage points, and paid vacation days by four percentage points. These reductions are economically meaningful, particularly given the relatively high baseline prevalence and cost of these benefits. In contrast, we find little evidence that firms reduce the provision of short-term or long-term disability insurance, suggesting that these benefits either complement the medical leave tier of PFML or remain valuable for worker recruitment and retention.

The effects of PFML vary significantly across firm size. Medium-sized firms drive most of the observed crowd-out, likely because they face tighter cost constraints while still offering a meaningful bundle of benefits pre-reform. Smaller firms, which rarely offer generous leave benefits to begin with, show little response. Larger firms, on the other hand, exhibit some evidence of “job upscaling,” maintaining or even expanding certain non-mandated benefits—such as dental or disability insurance—to differentiate themselves in the labor market.

To assess the broader implications of these behavioral responses, we conduct a welfare analysis that incorporates both the value of newly provided public benefits and the loss of private benefits due to crowd-out. Our results indicate that PFML programs can increase overall welfare, but only under certain conditions. Specifically, employees must value each dollar of public PFML benefits at least $0.95 to offset the combined effects of payroll tax financing and reduced employer-provided benefits. This threshold is likely met for workers with higher risks of needing leave—such as low-wage workers, individuals with health vulnerabilities, and prospective parents—especially in settings where crowd-out is limited.

Overall, this paper contributes to the literature on public-private interactions in social insurance by providing the first comprehensive evidence on firm responses to PFML programs in the U.S. We show that while public paid leave expands access and coverage, it also reshapes the composition of employer-provided benefits, with important implications for worker welfare and policy design.

Author

• Nicolas Robert Ziebarth, Center for European Economic Research
  Presenting Author