A miss in the Inflation Reduction Act: Better paid leave policies

The Inflation Reduction Act is now law. In the long run, the law is expected to have beneficial effects on deficit reduction as per the Congressional Budget Office. Through extensions of Affordable Care Act subsidies and prescription drug pricing reforms, it aims to decrease health care expenditures for seniors and lower-income households, and takes positive steps forward on climate policy through investments in clean energy and tax credits for households to offset energy costs.

However, as a recent Penn Wharton Budget Model analysis shows, the effects on inflation, the intended goal of the law, are likely to be negligible. As an immediate step to reduce inflation pressures, we could prioritize policies such as paid leave and affordable child care that increase labor force participation by bringing workers off the sidelines. At a time when job openings are at record highs and nominal wages are growing at the fastest pace in decades, it is time to reconsider policies that could offset rising pressure on the labor market but have been excluded as part of the Inflation Reduction Act.

The latest data from the Census Bureau’s Household Pulse Survey shows that more than 8.6 million Americans are not currently working because they either have family members who are sick from COVID, are sick themselves or are caring for children not in school or day care. Labor force participation plummeted at the onset of the pandemic and has not yet recovered to pre-pandemic levels. Even today, labor force participation is 1.0 and 1.7 percentage points below February 2020 levels for women and men, respectively.

In fact, at the beginning of the pandemic, in response to exactly these types of concerns, Congress passed the Families First Coronavirus Response Act (FFCRA) that provided new or expanded access to paid sick days and paid medical and family leave to families working at businesses with fewer than 500 employees and more than 50 employees. One goal of this legislation was to reduce the negative effects of COVID-19 on workers by allowing them to take paid time off while sick or caring for family, without losing their job.

The United States does not currently have a federal paid leave policy for new parents, or for workers with current medical needs or caregiving responsibilities. However, this changed — albeit temporarily — during the pandemic when FFCRA was passed. In response to this law, data from the Bureau of Labor Statistics shows that 25% of all firms created or modified paid sick or family leave policies in response to the pandemic. However, the program expired in December of 2020, which implies that this expansion of paid family and medical leave did not provide long lasting relief to families and workers who continue to be adversely affected by the pandemic.

Research suggests that access to paid leave and affordable child care can boost participation in the workforce after an individual or a loved one experiences a health shock. This is particularly true for women — research shows that the lack of paid leave accounts for nearly 30% of the reason women’s participation in the workforce is lower in the U.S. than in other countries.

In America’s contentious political climate, support for paid leave is one key area of bipartisan agreement among Americans and policymakers: Nearly 80% of Americans support permanent paid family and medical leave.

While Democrats and Republicans have both supported policies aimed at helping parents, these have taken different forms, either due to differences in covered populations or more importantly, differences in funding mechanisms. Democrats have typically supported new payroll taxes to fund paid leave programs, while Republicans prefer to use existing mechanisms and reduced spending as a means to finance leave.

For instance, Republican Sens. Mitt Romney and Marco Rubio proposed the New Parents Act, which would create a voluntary option for new parents to use Social Security benefits after the birth or adoption of a child. Across the aisle, Sen. Kirsten Gillibrand introduced the FAMILY Act, which would provide all workers access to paid family and medical leave.

The AEI-Brookings Paid Family and Medical Leave Working Group, which Aparna codirected, shows a compromise path forward by using a combination of the two funding mechanisms that could become a model. The work demonstrates how the existing patchwork of policies around paid parental, family and medical care leave often leave out the workers who need them the most.

To be sure, passing paid leave is not a magic wand that will resolve all financial burdens on families and enable workforce participation by itself. In addition to paid leave, the government must address high child care costs. The government recognized this need during the pandemic and provided support for families in the form of expanded, refundable and timely child care tax credits. The expanded Child Tax Credit temporarily reduced child poverty, though concerns remain about continuing these policies into the future due to their possible effects on disincentivizing work and the size of spending involved.

Although debate on what types of child care support will be politically feasible may continue, it is important to recognize that such policies address a growing concern facing families around the country, and Congress must act to ensure that financial support for families in need continues throughout the child’s early years.

The pandemic did not create existing cracks in our safety net — it revealed them. It also signaled the opportunity for cooperation between Democrats and Republicans on core issues that are fundamental to improving economic opportunity for Americans. We should heed these lessons to revitalize the social safety net and build a stronger support system for all Americans. A beneficial by-product? Easing inflationary pressures that also ultimately hit the poor the hardest.