Paid leave is good business, offering lasting rewards to employers, employees, and the economy. But the United States, nearly alone among its economic peers, does not guarantee paid leave or invest in providing it efficiently or affordably. This inaction gives employers who can afford to provide paid leave out of pocket a competitive advantage over those who cannot—to the detriment of small businesses that cannot pay to play. The small businesses that power America’s economy are losing out in the status quo and stand to gain from a national paid leave program.
From recruiting to retention to productivity and beyond, paid leave is good business
Paid leave is a powerful recruiting tool that helps employers bring in the employees they need. Most employers report that offering paid leave strengthens their ability to recruit talent.1 Small-business owners who offer paid leave report seeing it as a business imperative,2 likely for precisely this reason. These effects can play out in many ways. For example, workers with access to paid leave “are 22 percentage points more likely to recommend their job to a friend” than are those without paid leave.3
Workers with access to paid leave “are 22 percentage points more likely to recommend their job to a friend.”
Financial Health Network and National Partnership for Women & Families, "Unpaid and Unprotected" (2021).
Offering paid leave also helps reduce employee turnover.4 Talent retention is among the most common reasons employers cite for providing paid leave policies.5 Reducing turnover saves businesses substantial money: As Center for American Progress research has shown, employers that must replace an employee face the costs of recruiting and hiring as well as the reduced productivity of a new employee compared with an experienced and established employee.6 Replacing an employee can cost nearly 40 percent of that employee’s annual wages—a substantial out-of-pocket expense, especially for smaller employers.7
Paid leave means greater productivity, thus boosting the bottom line. Employers that adopt or expand paid leave policies see increased productivity across a variety of metrics, including both revenue and profitability per full-time equivalent.8 In addition, in one large-scale survey, most employers reported that paid leave policies increase employee morale.9 Greater employee well-being, in turn, corresponds to increased productivity and firm profitability.10
For employers, paid leave is not a favor to employees, it’s an investment in the business’ success. Talent recruiting and retention are core drivers of adoption of new or expanded paid leave policies,11 reflecting the importance of paid leave policies—or lack thereof—in a worker’s decision to choose one employer over another.12 As one Morgan Stanley executive summarized, paid leave has “significant impact in terms of improving productivity, retention, and employee morale” and “buys loyalty … that’s almost immeasurable relative to the cost.”13 Similarly, Hewlett Packard Enterprise CEO Antonio Neri explained that in relation to paid leave, “this was the way to retain the best talent … for us, it was an incredible return on investment.”14
Without public investment, paid leave is pay to play—and only some employers can manage the price tag
Today in the United States, only some employers can afford to invest in paid leave. Without a national paid leave program, American employers outside the 13 states and Washington, D.C., with guaranteed paid leave programs15 must pay out of pocket for paid leave. These costs can be substantial, including not only leave-taking employees’ wages but also any costs of covering work during workers’ absence and administrative logistics.16 It is therefore unsurprising that the most common reason employers—including small employers17—do not offer paid leave is cost.18
See also
Thus, firms with tight finances often cannot pay the price needed to reap paid leave’s benefits—a challenge that hits hard on many small businesses. In a 2023 survey, 52 percent of small businesses reported that they had trouble “paying operating expenses” in the past 12 months.19 In the same survey, 59 percent of small businesses that had applied for loans in the past 12 months did so in order to meet operating expenses—meaning that these firms were going into debt just to keep the lights on and the doors open.20 Under these circumstances, no matter how much small businesses want or need to provide paid leave, the cash to do so often simply is not there.
Similarly, new businesses often operate with extremely limited resources. More than 50 percent of employer firms start their businesses with less than $25,000.21 This cash crunch can make it difficult for new businesses—which bring critical value to communities and the economy22—to provide paid leave. Notably, Black-owned startups start with less capital and with lower levels of all kinds of funding than white-owned startups,23 creating material disadvantages that drag down Black-owned firms throughout their lives.24 Likely for related reasons, Black small-business owners are less likely to provide paid leave than their white peers.25
The result is a system that benefits larger, more established employers. Employees of firms with 100 or more employees are nearly twice as likely to have access to short-term disability through their employer as those at firms with fewer than 100 employees (61 percent vs. 32 percent).26 Moreover, even when employees at smaller businesses do have access to short-term disability coverage, they are more likely to have to contribute to the cost than employees at larger businesses,27 a less appealing form of coverage from a recruiting perspective. Gaps in access are similarly pronounced in paid family leave to bond with a new child or to care for a seriously ill loved one: Employees at employers with 100 or more employees are more than 75 percent more likely to have access than are employees at smaller employers.28
Policy inaction enables large, established companies to take all the paid leave gains while further cementing their competitive advantage
The lack of a national paid leave program systematically favors larger, better-resourced employers. This imposes heavy costs on small businesses and entrepreneurship, paralleling the costs of inaction imposed on working families and the economy in the form of lost wages that were highlighted in prior CAP research.29
Companies that can afford to provide paid leave gain a leg up in hiring over smaller companies that cannot afford to offer the same benefits out of pocket.30 Employers who can afford to do so deliberately turn to new or expanded paid leave policies in order to compete for employees,31 particularly when the competition for workers is most intense.32 In other words, the most resourced employers are leveraging their ability to provide paid leave to gain a hiring advantage over other employers.
This boon to big business comes at the cost of putting small businesses at a competitive disadvantage. Small-business owners who do not provide paid leave—likely because they cannot afford to do so—report negative impacts on hiring.33 Especially in an unusually tight labor market,34 small businesses face profound recruiting challenges across the board: In a January 2024 survey, 81 percent of small businesses reported difficulty in “recruit[ing] qualified candidates for open positions.”35 Allowing large employers to buy their way into another advantage by providing paid leave that small employers cannot compete with only compounds that difficulty.36
Moreover, employers that can afford to provide paid leave also get an advantage in retaining current employees, holding on to the talented, trained employees who can make a business thrive while avoiding costly employee turnover. Congressional research found that employees who had access to and used family or caregiving leave were less likely to quit than those who did not use leave and that those who took leave were more likely to get raises or promotions.37 In other words, paid leave corresponded to keeping the very employees that businesses most wanted to keep. Employers who can afford to pay for paid leave out of pocket can lock in those employees with paid leave, while smaller and less wealthy employers cannot compete.
Conversely, small businesses that cannot afford to provide paid leave out of pocket can lose the employees they rely upon and have invested in. In congressional testimony, small-business owner Tony Sandkamp described the “pain and damage” of losing a valued employee whose mother was dying of cancer because Sandkamp’s five-person business could not afford to provide paid leave. Because there was not yet a public paid leave program covering his workers, Sandkamp’s “business paid the price. This employee was one of the best performers on our team for several years. The costs in time and money to replace him were astronomical.”38
Without public paid leave, many small businesses may never start in the first place. Today, the self-employed have essentially no access to paid leave in most states.39 When starting a new business means giving up paid leave would-be entrepreneurs and their families count on, striking out on their own may become less attractive—a form of job lock, where workers are deterred from switching jobs to avoid losing benefits.40 Job lock restricts worker mobility and impedes entrepreneurship.41 For those who cannot afford to leave a job that provides paid leave or to take the risk of not having paid leave when they need it, failure to guarantee public paid leave can be a barrier to entrepreneurship.42
And for those who do start their own businesses, lack of access to paid leave comes at a profound cost to themselves and to the sustainability of their businesses. Small-business owners are also human beings who need leave for themselves—to heal, to bond, to care. But without a universal paid leave program, many small-business owners with and without employees cannot afford to take the leave they need for themselves.43 For example, small-business owner Karina was working just six days after giving birth, telling Glamour, “There’s no option really. I have to work. I can’t stop completely. We need the money.”44 Similarly, KB Brown, a Minnesota small-business owner, was in a serious car accident but could not take the time off he needed because, “As a business owner, if you don’t work, you don’t eat.”45 That takes a profound toll on both business owners and businesses, making the entrepreneurship that fuels the economy less sustainable.46
Inaction on paid leave reinforces dangerous economic trends toward consolidation and a less competitive, less vibrant economy
For decades, industry after industry has become more consolidated, giving larger firms greater market power at the expense of everyone else.47 Insufficient competition allows dominant firms to pocket outsize gains while blocking potential competitors from emerging and growing, alongside harms ranging from higher prices to reduced wages to a less resilient supply chain.48 Failure to invest in paid leave gives the bigger, better-resourced companies another advantage they do not need, bolstering this concerning trend toward consolidation rather than combating it.
Policy innovations to promote a more competitive economy—such as revitalizing antitrust policy and enforcement,49 banning noncompete agreements,50 and enacting pro-small-business provisions in the American Rescue Plan and in the Inflation Reduction Act51—have been a priority of the Biden-Harris administration.52 Further action, including guaranteed paid leave, is needed to cement and build upon recent gains.53
Guaranteed paid leave is a necessary investment in small-business success and a thriving economy
Universal public paid leave programs level the playing field for small businesses in key ways. By guaranteeing paid leave, as some individual states already do,54 the United States can reverse the damaging and distortive effects of the status quo and actively empower and support small businesses and entrepreneurship.
A universal paid leave program unlocks the rewards of paid leave for all employers, including small businesses
Public paid leave programs allow all businesses, including small businesses and the self-employed, to reap the benefits of paid leave. In some programs, employers pay a fraction of a percentage of employee wages in contributions to an insurance system.55 This approach provides paid leave to a small business’ entire workforce affordably, often for less than the cost of a single out-of-pocket leave.56 In other policies, small businesses do not pay anything at all, giving them access to the rewards of paid leave for free.57 In either structure, public paid leave programs provide the paid leave that small businesses and their employees need at a price tag they can handle.
The results of state programs mirror the gains individual employers see from paid leave policies while massively expanding access to those gains. Most small-business owners in states with paid leave programs report improved retention.58 For example, California employers across the board were less likely to see high turnover following the start of the state’s paid family leave law than were peer employers in states without paid leave guarantees.59 A decade after paid family leave went into effect in the state, the average California firm had a lower turnover rate than before the law.60
But the benefits to employers are broader. One study found that in states with paid leave laws, employers saw a 5 percent increase in productivity compared with peer employers in states without such laws.61 Other research points to further benefits that enhance the bottom line. In New Jersey, for example, employers reported lower employee stress in relation to the state’s paid family leave insurance program.62 In addition to the profound negative impacts of workplace stress on workers’ health,63 stress is a drag on employee productivity.64 Similarly, in a 2024 survey, most small-business owners reported that paid leave improves employee morale,65 another positive indication of the kinds of employee well-being that support productivity and profitability.66
In states with paid leave laws, employers saw a 5 percent increase in productivity compared with peer employers in states without such laws.
Bennett and others, “Paid Leave Pays Off" (2021).
Public paid leave programs provide employers with the flexibility to meet their business needs during a leave
To provide paid leave, employers need to be able to take care of their business needs during the time the employee is on leave. Without a universal paid leave program, for example, nearly two-thirds of small employers in one state survey agreed that, “When my staff currently take leave, it’s a strain to get coverage and recover the costs associated with their absence.”67 For small businesses, each individual employee is often critical to the business’ success, making their absence felt: In a national survey, nearly one-quarter (22 percent) of small businesses reported that “the disruption of business operations when a member of a small team is absent [is] a constraint on their ability to offer paid leave.”68
In a public paid leave program, the system pays workers while they are on leave.69 While employees are taken care of, employers retain the money they would have used to pay the leave-taking employees’ wages had the employee continued working. This allows employers to use the money they retained to cover any added costs or other otherwise meet the needs of the business.70 For example, if employers face costs related to covering for the employee taking leave—such as paying overtime or additional hours to remaining employees or hiring temporary workers—they would have fully flexible cash to cover those needs.71
Moreover, employers often address the gap from a worker on leave in ways that don’t require direct additional spending. State-level72 and national73 studies show that reassigning work to other employees, which does not necessarily require additional spending, is the most common method employers use to cover for employees on leave. Other employers postpone work until the leave-taking employee returns, another solution without immediate cost implications.74 In those cases, employers can reinvest the funds in their business or otherwise use them as they see fit.
Public programs take on the administrative labor of providing paid leave, taking responsibility off employers
Employers that provide paid leave privately must invest in resources to evaluate, monitor, and pay employee claims. But a public paid leave program can do much of that administrative work—such as reviewing medical documentation, assessing employee eligibility, and monitoring leave duration—at no added cost. Employers reap the benefits of these public services: For example, when New York’s paid family leave program went into effect, employers reported greater ease in handling extended employee absences.75
These leave administration services are of particular benefit to small businesses, which may be less likely to have dedicated human resources (HR) staff.76 Ben Verhoeven, owner of Oregon small business Peoria Gardens, highlighted this in Senate testimony: “As a small business owner, I am the HR department. … Oregon’s program manages the process, confirms a worker qualifies, and of course pays for the leave itself out of the fund. This is a real service, both for me and for my workers.”77
Conclusion
Paid leave benefits businesses of all sizes, but without public investment, only the largest and richest employers can afford to reap the rewards, giving them one more advantage in a landscape already tilted in their favor. The United States must invest in small-business success and in a more competitive, more vibrant economy by guaranteeing paid leave for all. Guaranteeing paid leave for all would provide a strong investment in small-business success and a more competitive, vibrant economy.