Parental leave changes will hurt more than the Government believes

The government offers new parents 18 weeks parental leave paid at the minimum wage. It’s worth $11,500. Until now that policy was available to everyone. But the government will now retract the offer for people whose jobs offer them parental leave.

I can see the attraction of cutting it, to save $1 billion. And I don’t expect vast waves of public sympathy for the kind of people who have good employer parental leave schemes. These people are wealthier and well-attached to the labour force.

“At the moment people … are effectively double dipping — we are going to stop that,” – Treasurer Joe Hockey.

But the “double dipping” terminology is partly responsible for the positive initial reaction to this announcement. I was surprised to see even the redoubtable Peter Martin using that terminology in his report on the policy this morning.

Looking at it like that is insufficient. The question is complex. How to take away government services as the private sector provides them is one of the trickiest parts of any policy sphere.

In some policy areas, no matter your private endowments, the government provides. Public transport is available to people whether or not they own cars. Medicare is universal – even those with private health insurance can use it.People with Foxtel are still able to tune into the ABC. Public schools are not reserved for those who can’t afford private ones, etc.

In other areas, we means-test things tightly. Welfare payments are removed as quickly as possible as people earn more money, even though that creates high effective marginal tax rates.  (There is a strong movement arguing for a “basic income” which would effectively be a universal and non means-tested welfare payment).

In each of these cases, a range of questions comes to bear. Is the offering in question a universal right, or a safety net? Is it very expensive to provide widely without means-testing? Is it advantageous to have public and private provision alongside each other? And what will be the effect on private sector provision if the government means-tests?

This last point is crucial in this case.

If you work for a university like the Australian Catholic University that offers 52 weeks paid leave, your employer might not see the new policy arrangements as competitive. The government’s 18 weeks at minimum wage is no substitute. But the average duration of paid parental leave in Australia is under 10 weeks.

For most companies, I expect they will see that their expensive-to-provide policies are offering little or no net benefit to their employees, so they will have no reason not to cancel them.

This policy might actually provide savings to employers, but it will lead to a real fall in the amount of paid time new parents can spend with their children.

Instead of drawing on both, parents will then draw on only the government scheme and there will therefore be a drop in the amount of parental leave taken.

Faced with this shorter period of parental leave, parents will then choose whether to return to work. It could even cause some new parents to sever their connection to the workforce. The consequences could be further reaching than they seem.