When California became the first U.S. state to mandate paid family leave in 2004, many employers predicted higher costs, disruption, and no upside. After the law took effect, surveys found something else: Most reported no negative impact, and many said productivity held steady or improved.
That gap between expectation and reality caught the attention of Léa H. Stern, Associate Professor of Finance and Business Economics and the Carol Batchelder Endowed Finance Faculty Fellow at the Foster School of Business. In a study forthcoming in the Review of Finance, Stern and her co-authors examined whether policies like these produce measurable effects for businesses. Prior research had shown that paid leave influences whether women return to their previous employers after having children — but whether those individual decisions added up to something visible at the company level was an open question.
“We went into this pretty agnostic as to what we would find,” Stern says. “There were credible arguments in both directions.”
A natural experiment hiding in state law
The tricky part was isolating the law’s effect: Did paid leave actually drive any changes, or were other factors at work? You can’t simply compare firms that offer paid leave with those that don’t. Companies that voluntarily offer generous benefits differ in too many ways to isolate the effect of any single policy. So the researchers used a natural experiment: the staggered rollout of paid family leave laws across states between 2004 and 2018.
Because different states adopted the laws at different times, Stern and her co-authors — Benjamin Bennett, Isil Erel, and Zexi Wang — could compare firms in newly covered states against similar firms in states where the law hadn’t yet taken effect, watching how firm performance changed over time in each group. The dataset spanned more than 3,400 publicly traded firms and nearly 180,000 business establishments, including both public and private firms, across more than two decades.
What the data showed
Firms affected by the new laws saw return on assets rise by roughly 1.3 percentage points after their state’s paid leave law went into effect, relative to comparable firms in states without such laws. Employee turnover also fell, specifically among women of childbearing age — the group most directly affected by the policy. Women over 45 did not see this effect. Productivity across individual workplaces rose by about 5 percent. Stock returns in the year following a state’s adoption of paid leave were also positive.
Stern says the size and consistency of the gains were the most surprising part of the study.
“My co-authors and I were trained to believe that firms know what they’re doing, that markets work, and that market failures are pretty rare,” she says. “Finding that a state mandate could have such a consistent, strong positive effect — that was, yes, to some extent surprising for us.”
What happens when paid family leave becomes law? Léa H. Stern found measurable gains in productivity and employee retention.
The costs everyone can see, and the benefits they can’t
If paid leave can help firms, why don’t more offer it voluntarily?
Stern points to two reasons. First, the costs are easier to see than the benefits. Scheduling changes, temporary coverage, and administrative work are immediate and measurable costs.
“The costs are really easy to see and quantify,” she says. “But the benefits are a little bit fuzzier.”
Those benefits can include retaining experienced employees, reducing turnover, and keeping more women on leadership tracks.
Second, a firm that offers generous leave on its own risks disproportionately attracting workers who intend to use it. That firm bears the costs, while the benefit of a more stable and committed workforce never fully materializes. A mandate levels the playing field and eliminates that risk.
“I think this is a relatively rare case where a government mandate alleviates a market friction rather than creating one,” she says.
What about smaller firms?
Most research on employee benefits focuses on publicly traded companies, largely because data is easier to obtain. Stern’s team made a point of including private firms — and for good reason. Cost concerns about paid leave are loudest for smaller businesses, and private firms employ a substantial share of workers.
The results held. Private firms also saw productivity gains following the adoption of paid leave laws, though the effect was somewhat smaller than for publicly traded companies.
Part of the explanation, Stern notes, is awareness: Early survey evidence from California found that employees at smaller firms often didn’t know paid leave was available or how to access it, which likely discouraged employees from using it and reduced the overall effect.
From the classroom to the balance sheet
Stern teaches business valuation at Foster, where competitive advantage is a central concept. The usual examples include brand equity, patents, and network effects. She encourages students to consider corporate culture as well — specifically, whether a firm’s practices help it attract and retain the talent it needs. In Stern’s view, paid leave is one example of how workplace culture can translate into measurable business value.
Stern came to the topic with more than academic interest. She had both of her children while completing her doctorate, and grew up in France, where paid leave standards are far more generous. Watching family members in Canada navigate a more generous system, and seeing how that shaped their careers, kept the research grounded in something real.
Stern is deliberate about what the findings can and can’t support: This isn’t a full accounting of costs and benefits across all parties, and no single study can guarantee outcomes for every firm in every context. What the evidence does support is a shift in the default assumption.
The United States remains unusual among industrialized countries for lacking a national paid family leave program. As that policy debate continues, this research offers something that was largely missing from it: systematic, causal evidence on what actually happens to businesses when they’re required to offer paid leave. So far, the answer looks far better than many skeptics predicted.
Léa H. Stern is an Associate Professor of Finance and Business Economics and the Carol Batchelder Endowed Finance Faculty Fellow at the Foster School of Business. She is part of the faculty shaping Foster’s new Master of Science in Finance (MS in Finance), a pre-experience program designed for students who want to build serious analytical depth before entering the workforce.