The economic costs of expanding the Family and Medical Leave Act to small business: Well-Intended public policy may have some unintended consequences

Business Economics, April, 2002 by Bruce D. Phillips

Consulting fees are also necessary to deal with potentially complex privacy issues. We assume that these "material costs" add an additional $500 per small firm based upon the estimates provided in OSHA's Health and Safety Program Rule (Phillips and Dennis, 2001). These costs would only be applied to the small business sector, since larger firms generally appear to have privacy rules in place already, based upon their SEC 10-K filings.

Increased record-keeping costs due to the expanded FMLA and some new computer programs or ledger books may be needed. We assume a bookkeeping cost of $1,000 per small firm per year (twenty hours at $50 per hour) to track and file any government-mandated paperwork for compliance with state and/or federal FMLA expansions. These costs are assumed to be virtually zero for larger firms because the needed information may often be found in other federally mandated regulatory compliance reports already prepared for agencies such as Environmental Protection Agency, OSHA, or Commerce.

Additional Costs Associated With Expansions in the FMLA

Increases in UI taxes. If the states adopt an extended paid FMLA program, the UI trust funds are likely to be exhausted. It is conceivable that a baby UI program would put all employers at a risk of an increase in unemployment taxes. (28)

Assume that if a baby UI program is put in place, the percentage of workers taking paid leave would rise from the present sixteen percent to twenty-five percent of the work force, a reasonably conservative assumption. There are about 20.3 million employed workers in firms with under twenty workers in the labor force and approximately 19.4 million workers in firms with twenty to ninety-nine employees (U.S. Small Business Administration, 2001). Therefore, about 5.08 million workers in small firms and 4.85 million workers in larger firms might be expected to apply for a period of paid leave. How much would these workers receive? Assuming the national average unemployment compensation of $220 per week, this is equivalent to each leave-taker receiving $2,640 over a twelve-week period. The amounts that would need to be replaced from the state UT trust funds are about $13.4 billion dollars, or $2,686 per firm, from workers taking leave in small firms, and $12.8 billion, or $22,631 per firm, from workers taking leav e from larger firms. (29) These costs are called "fees" in the RIM.

Rehiring (recruiting) costs to replace workers who never return. These costs are a function of labor market tightness, and they are difficult to predict. Costs also depend on whether the employee on extended FMLA leave who quits is a "key" (e.g. very important) employee. Recruiting is a difficult cost to model directly, and the literature offers little data to derive the probability that a worker on FML would never return or will quit within a short time after returning. In the 1995 report of the FMLA Commission, eighty-four percent of leave takers returned to their same employers, six percent changed employers, and ten percent left the labor force. (30)