Grace Paley (née Goodside) was born in New York to Isaac and Manya Ridnyik Goodside, who anglicized the family name from Gutseit on immigrating from Ukraine. Her father was a doctor. The family spoke Russian and Yiddish along with English. The youngest of the three Goodside children (sixteen and fourteen years younger than brother and sister Victor and Jeanne, respectively), Paley was a tomboy as a child.
In 1938 and 1939, Paley attended Hunter College, then, briefly The New School, but never received a degree. In the early 1940s, Paley studied with W. H. Auden at the New School for Social Research. Auden's social concern and his heavy use of irony is often cited as an important influence on her early work, particularly her poetry. On June 20, 1942, Grace Goodside married cinematographer Jess Paley, and had two children, Nora (1949-) and Danny (1951-). They later divorced. In 1972 Paley married fellow poet (and author of the Nghsi-Altai series) Robert Nichols.
She taught at Sarah Lawrence College. In 1980, she was elected to the National Academy of Arts and Letters and in 1989, Governor Mario Cuomo made her the first official New York State Writer. She was the Vermont State Poet Laureate from March 5, 2003 until July 25, 2007. She died at home in Thetford, Vermont at the age of 84 of breast cancer. In a May 2007 interview with Vermont Woman newspaper – one of her last – Paley said of her dreams for her grandchildren: "It would be a world without militarism and racism and greed – and where women don't have to fight for their place in the world."
Paley taught writing at Sarah Lawrence College from 1966 to 1989, and helped to found the Teachers & Writers Collaborative in New York in 1967. She also taught at Columbia University, Syracuse University and the City College of New York. Paley summarized her view of teaching during a symposium on "Educating the Imagination" sponsored by the Teachers & Writers Collaborative in 1996:
"Our idea," Paley said, "was that children—by writing, by putting down words, by reading, by beginning to love literature, by the inventiveness of listening to one another—could begin to understand the world better and to make a better world for themselves. That always seemed to me such a natural idea that I’ve never understood why it took so much aggressiveness and so much time to get it started!"
Paley was known for pacifism and for political activism. She wrote about the complexities of women's and men's lives and advocated for what she said was the betterment of life for everyone. In the 1950s, Paley joined friends in protesting nuclear proliferation and American militarization. She also worked with the American Friends Service Committee to establish neighborhood peace groups, through which she met her second husband Robert Nichols.
With the escalation of the Vietnam War, Paley joined the War Resisters League. In 1968, she signed the “Writers and Editors War Tax Protest” pledge, vowing to refuse tax payments in protest against the Vietnam War, and in 1969 she came to national prominence as an activist when she accompanied a peace mission to Hanoi to negotiate the release of prisoners of war. She served as a delegate to the 1974 World Peace Conference in Moscow and, in 1978, was arrested as one of "The White House Eleven" for unfurling an anti-nuclear banner (that read "No Nuclear Weapons—No Nuclear Power—USA and USSR") on the White House lawn. Into the 1990s Paley supported efforts to improve human rights and resist U.S. military intervention in Central America.
After a number of rejections, Paley published her first collection, The Little Disturbances of Man (1959) with Doubleday. The collection features eleven stories of New York life, several of which have since been widely anthologized, particularly "Goodbye and Good Luck" and "The Used-Boy Raisers." The collection introduces the semi-autobiographical character "Faith Darwin" (in "The Used-Boy Raisers" and "A Subject of Childhood"), who later appears in six stories of Enormous Changes at the Last Minute and ten of Later the Same Day. Though as a story collection by an unknown author the book was not widely reviewed, those who did review it (including Philip Roth and The New Yorker book page) tended to rate the stories highly. Despite its initial lack of publicity, The Little Disturbances of Man went on to build a sufficient following for it to be reissued by Viking Press in 1968.
Goodbye and Good Luck was adapted as a musical by Melba Thomas (book), Muriel Robinson (lyrics) and David Friedman (music) in 1989 and is currently being reworked.
Following the success of Little Disturbances of Man, Paley's publisher encouraged her to write a novel. After several years of tinkering with drafts, Paley went back to short fiction. With the aid of Donald Barthelme, she assembled a second collection of fiction in 1974, Enormous Changes at the Last Minute. This collection of seventeen stories features several recurring characters from Little Disturbances of Man (most notably the narrator "Faith," but also including Johnny Raferty and his mother), while continuing Paley's exploration of racial, gender, and class issues. The long story, "Faith in a Tree," positioned roughly at the center of the collection, brings a number of characters and themes from the stories together on a Saturday afternoon at the park. Faith, the narrator, climbs a tree to get a broader perspective on both her neighbors and the "man-wide world" and, after encountering several war protesters, declares a new social and political commitment. The collection's shifting narrative voice, metafictive qualities, and fragmented, incomplete plots have led most critics to classify it as a postmodernist work.
Paley continues the stories of Faith and her neighbors in the Later the Same Day (1985). All three volumes were gathered in her 1994 Collected Stories, which was a finalist for both the Pulitzer Prize and the National Book Award.
Although more widely known for her short fiction, Paley also published three volumes of poetry, Leaning Forward (1985), New and Collected Poems (1992), and Long Walks and Intimate Talks (1991).
She contributed the piece "Why Peace Is (More Than Ever) a Feminist Issue" to the 2003 anthology Sisterhood Is Forever: The Women's Anthology for a New Millennium, edited by Robin Morgan.
Paley's honors include a 1961 Guggenheim Fellowship for Fiction, the Edith Wharton Award (1983), the Rea Award for the Short Story (1993), the Vermont Governor's Award for Excellence in the Arts (1993), PEN/Malamud Award for Excellence in Short Fiction (1994), and the Jewish Cultural Achievement Award for Literary Arts (1994). In 1988, American composer Christian Wolff set eight poems from Leaning Forward (1985) for soprano, bass-baritone, clarinet/bass-clarinet, and cello.
At Dartmouth College's fifth annual Social Justice Awards ceremony in 2006, Paley received the Lester B. Granger '18 Award for Lifetime Achievement.The Little Disturbances of Man (short stories, 1959)
A Subject of Childhood and a conversation with the author in New sounds in American fiction editor Gordon Lish (1969)
Enormous Changes at the Last Minute (short stories, 1974)
Later the Same Day (short stories, 1985)
Leaning Forward (poetry, 1985)
365 Reasons Not to Have Another War (with Vera Williams, nonfiction, War Resisters League 1989 Peace Calendar 1989)
Long Walks and Intimate Talks (stories and poems, 1991)
New and Collected Poems (1992)
The Collected Stories (1994)
Just As I Thought (semiautobiographical collection of articles, reports, and talks, 1998)
Begin Again: Collected Poems (2000)
Fidelity (2008), posthumous 
A documentary film entitled Grace Paley: Collected Shorts (2009), directed by Lily Rivlin, was presented at the Woodstock International Film Festival and other festivals in 2010. The film contains interviews with Paley and friends, footage of her political activities, and readings from her fiction and poetry.