A striking thing about the jobs most commonly chosen by newly minted graduates of elite law schools, is that they come with valuable fringe benefits. Base salaries are widely imitated and therefore fairly uniform, but firms compete a bit more when it comes to benefits. Health plans, inclusion of same-sex partners, fitness centers, part-time work options, and other things are on the minds of employers and employees, but one particularly expensive and nonuniform benefit is parental leave. At Thanksgiving dinner this year I sat next to a new associate at a Boston firm who seemed thrilled that her firm offered maternity and paternity leave, for biological or adopted children, of three paid (plus benefits) months. The law requires only some leave without pay, so we can think of this as a benefit worth more than $50,000 per child. I think my friend's reaction was partly social/political, as she prefers a world in which parenting is encouraged, or at least not penalized, in this manner, and I think it is also economically rational. She does not think of this costly benefit as coming out of her paycheck, although I think it unlikely that she cashes in on this benefit with this employer, because she correctly sees her own compensation as moving in step with other firms' base salaries. I think her reaction would be the same even if the associate in the office next door had five children in the next five years, and even if that associate's partner also received paid leave from his or her employer. Of course, the birthrate in this group is likely to be low. The benefits come out of the partners' returns, though they may of course encourage new associates to join this firm.
Meanwhile, other guests at the meal represented the other trend in the new generation of professionals: freelancers with no benefits at all. We now see a large group of affluent citizens who buy their own health care, decide their own level of vacationing, and presumably bear the full costs of parenting decisions, unless they are more likely to be attached to a partner who works for one of the high-benefit employers. This bifurcation of high-end employment, if it is that, can be traced to tax law in part, but also to a sort of signalling theory. Firms signal and compete with the benefits they offer, even as some of these benefits are tax-favored. The non-favored benefits need not be offered to all employees, and they are generally not so offered. The mailroom staff is unlikely to enjoy much in the way of paid leave. There is, in short, some bifurcation within firms as well as across industries and job classifications.
In an earlier post (and eventually in conventionally published work) I note that political change is less likely where important interest groups already enjoy a benefit; there would be more of a political move for subsidized, universal parental leave if fewer privileged citizens already enjoyed such leave, just as there would be more of a cry for health care "reform" and perhaps better public education if there were not lavish private alternatives. I do not mean to say that uniformity would necessarily be good, just that the interest group politics are important to bear in mind. But after thinking about that parental leave and doing some back-of-the-envelope calculations, I will hazard the guess that the current multiple equilibria are unstable. My guess is that employers will compete for a while with these benefits, but then cut back on them substantially in favor of some sort of cafeteria plan or a dramatic salary increase, accompanying a cutback in benefits. Yes, I know, we can think of paid parental leave as a sort of insurance policy, particularly for new professionals at law firms and investment banks who are unlikely to know ex ante about the role children will play in their lives over the next five years. But there is so much turnover in this group that some adverse selection is likely. Second, the levels of compensation are such that insurance hardly seems necessary. Finally, the contrast with lower-paid employees in the same firm, not to mention with professionals to whom work can be outsourced, will begin to seem politically incorrect or simply too expensive.