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A blog post from Stephen Herzenberg, originally published on Third and State.

Last week, I wrote that when you look at the positive benefits and the low costs of Philadelphia’s proposed paid sick days legislation, it could end up paying for itself.

As I wrote that, I could almost hear a collective gasp from neoclassical economists: “If it paid for itself, employers would already do it!”

Employers in the standard economic model are assumed to be all knowing (they have “perfect information”) about the present and all possible futures. When it comes to whether to offer paid sick days, for example, it is assumed that employers can estimate the turnover savings that would result as well as any productivity benefit.

If you embrace the standard model, all employer behavior is the result of a profit-maximizing calculation. Thus, the difference between employers that offer paid sick days and those that don’t is that the profit-maximizing calculation comes out differently for the two groups. One group of employers finds that paid sick days pay for themselves. The other group finds that paid sick days don’t pay for themselves. (Six out of 10 workers are at employers that offer paid sick days without a mandate and four out of 10 workers are at employers that don’t provide paid sick days.)

Now I’m an “institutional economist” who rejects the perfect information assumptions of standard economics. I also reject the standard view of how businesses make decisions as implausible, which means we need another explanation.

I also happen to direct a small business that employs eight people, and we offer paid sick leave. The idea that we do because we’ve done some precise calculation that it’s good for business is, well, laughable. We do believe that it’s good for business, but that belief is more an expression of our organizational philosophy and approach, rather than something we can “prove” mathematically. If we’re going to expect employees to go the extra mile when we have proposals due or a major event on the calendar, we need to be understanding when employees are sick or facing a family crisis.

So let me offer a different explanation to the standard economists’ view about what distinguishes employers that provide paid sick leave from those that don’t. What distinguishes these employers is that they have different “business strategies” and associated organizational and human strategies.

By and large, businesses that provide sick leave buy into the idea that treating employees fairly pays for itself. These businesses may also see paid sick leave as part of a reciprocal relationship in which employer and employee recognize each other’s needs. Businesses that provide paid sick days may also have a bit more technological and organizational sophistication: they know that tracking paid sick days is a one-time $100 adjustment to a time sheet or payroll service contract; they have the experience and confidence to know that “sky is falling” claims about the astronomical costs of administrating paid sick days are silly.

So here are two questions:

  • Does Philadelphia — or any city or state — want more businesses with enlightened approaches that lead them to provide paid sick leave or more with business strategies that mean they don’t provide paid sick leave?
  • Which of the following is more likely to get you more businesses with enlightened approaches: (1) advanced and effectively enforced labor standards, including paid sick leave, or (2) having low standards?

Ideally, advanced standards should be accompanied by technical assistance that help businesses shift their strategies in ways that make complying with standards a natural outgrowth of operating practices. For example, the city could give Philadelphia’s Sustainable Business Network (SBN) a contract to manage a “sustainable small business partnership” that promotes advanced organizational practices across the board at employers with less than 50 workers. The mix of carrot and stick, technical assistance and mandate, is more effective than either alone. Our shorthand for this common sense and pragmatic combination is “pave the high road and block the low road.”

In the environmental area, the idea that high standards promote innovation and economic competitiveness is gaining ground, helped by mainstream support from the likes of Harvard Business School professor Michael Porter. In the labor area, there’s not as much embrace of the idea that advanced standards can drive innovation. There is more embrace of the idea that 19th century labor standards gets you something other than 19th century capitalism.

But when it comes to people as well as to the environment, Philadelphia wants to be ahead of the curve in adapting enlightened workplace standards. That’s how to attract and grow entrepreneurs and committed workers who can make Philadelphia a center for innovation and growth.

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