The Economic Consequences of Parental Leave Mandates : Lessons from Europe

This study investigates the economic consequences of rights to paid parental leave in nine European countries over the 1969 through 1993 period. Since women use virtually all parental leave in most nations, men constitute a reasonable comparison group, and most of the analysis examines how changes in paid leave affect the gap between female and male labor market outcomes. The employment-to-populations ratios of women in their prime childbearing years are also compared with those of corresponding aged men and older females. Parental leave is associated with increases in women's employment, but with reductions in their relative wages at extended durations. Article: Over 100 countries have enacted some form of parental leave policies, with most assuring at least two to three months of paid job absences [Kamerman 1991]. Nevertheless, the effects of providing rights to time off work in the period surrounding childbirth remain poorly understood. Proponents believe that parental leave results in healthier children and improves the position of women in the workplace. Opponents counter that the mandates, by restricting voluntary exchange between workers and employers, reduce economic efficiency and may have a particularly adverse effect on women. The results of previous research on parental leave are ambiguous. Some U. S. studies suggest that time off work is associated with increases in employment and wages [Dalto 1989; SpalterRoth and Hartmann 1990; Waldfogel 1994, 1997]. However, since these analyses cover a period when most leaves were voluntarily provided by employers, rather than being required by law, the differences in labor market status may result from nonrandom selection into jobs providing the benefit, and the evidence is difficult to interpret. Other researchers have attempted to overcome the selection problem by examining legislated parental leave benefits. Klerman and Leibowitz [1997] uncover mixed employment effects of maternity leave mandates instituted by some states during the late 1980s. Waldfogel [1996] finds that recently enacted federal legislation in the United States had little effect on wages, while modestly increasing employment; but this last result is sensitive to the model estimated. The ambiguous results of these studies may reflect the limited scope of the federal and state mandates or inadequacies of the data. Finally, Ruhm and Teague [1997], using information for seventeen nations, show that short to moderate entitlements to parental leave are positively related to per capita incomes, employment-to-population ratios (EP ratios), and labor force participation rates. However, there is little indication of stronger effects for women than for men, raising concern that the direction of causation may be misidentified. This study investigates the labor market consequences of rights to paid parental leave using data for nine European countries over the 1969 through 1993 period. 1 The dependent variables are EP ratios and hourly wages. 2 Since women use virtually all parental leave in most countries, men constitute a reasonable comparison group, and the "natural" experiment examines how changes in leave entitlements affect the gap between female and male outcomes. 3 Limited analysis is also undertaken using 25-34 year old women as the treatment group and corresponding men or females aged 45-54 as the comparison group. The younger women are in their prime childbearing years and so should be strongly affected by leave mandates. Time and country effects are controlled for throughout the analysis to provide "difference-in-difference-in-difference" (DDD) estimates. Country-specific time trends are frequently included to capture the effects of group-specific factors that vary over time within countries. European data are particularly useful for investigating the effects of parental leave. All Western European countries currently offer at least three months of paid maternity benefits, but many of the policies have been instituted or significantly revised during the last 30 years, resulting in substantial variation over time and across countries in the type and duration of the entitlements. Conversely, the United States did not require employers to provide parental leave until the 1993 passage of the Family and Medical Leave Act (FMLA). 4 Better understanding the effects of parental leave mandates is important in both the European and United States contexts. Europe has been grappling with the question of whether extensive social protections inhibit economic flexibility and are a cause of low rates of recent employment growth [Blank 1994]. These concerns have recently led a number of countries to shorten the period of leave or reduce payments provided during it, at the same time that other nations have increased them [Organization for Economic Cooperation and Development 1995]. Conversely, advocates (e.g., the Carnegie Task Force on Meeting the Needs of Young Children [1994]) have argued for broadening the U. S. federal law to include small employers and provide payment during the time off work. To preview the results, rights to paid leave are found to raise the percentage of women employed, with a substantial effect observed for even short durations of guaranteed work absence. In the preferred econometric specifications, leave legislation raises the female employment-to-population ratio by between 3 and 4 percent, with larger effects for women of childbearing age. Around onequarter of this change probably results from increases in the number of women who are reclassified as "employed but absent from work" due to the availability of leave. Brief leave entitlements have little effect on women's earnings, but lengthier leave is associated with substantial (2 to 3 percent) reductions in relative wages. 1. A distinction is sometimes made between "maternity leave," which is granted to mothers for a limited period around the time of childbirth, and "parental leave," which permits additional time off work to care for infants or young children. Both are included in the definition of parental leave used below. 2. An earlier version of this paper also included weekly work hours as an outcome. There was little indication of a strong parental leave effect, and the results were sensitive to the specification chosen, probably partly because sexspecific data on work hours were unavailable for many countries. 3. Gruber [1994] and Waldfogel [1996] have similarly used men as a comparison group when examining the effects of mandated maternity benefits and parental leave legislation in the United States. 4. The FMLA requires employers with more than 50 workers in a 75-mile area to allow twelve weeks of unpaid leave following the birth or adoption of a child or for personal illness or the health problem of a family member. Health insurance contributions must be continued during the period. Firms need not provide leave to the highest paid 10 percent of their workforce or persons employed less than 1250 hours during the previous year [Ruhm 1997]. Ten states and the District of Columbia legislated job-protected work absences prior to the FMLA, and eight others supplied limited rights to parental leave without guaranteeing the reinstatement of employment [Waldfogel 1994]. The state laws were enacted in the late 1980s or early 1990s and included numerous exemptions. I. THE ECONOMICS OF PARENTAL LEAVE MANDATES In a competitive spot labor market with perfect information and no externalities, mandated benefits such as parental leave reduce economic efficiency by limiting the ability of employers and workers to voluntarily select the optimal compensation package. Nevertheless, supporters argue that parental leave entitlements improve the health and well-being of children (e.g., Zigler, Frank, and Emmel [1988] and the Carnegie Task Force on Meeting the Needs of Younger Children [1994]). This might occur if the benefits represent externalities that are not adequately valued by agents negotiating labor contracts. For instance, the gains might not be fully taken into account if workers have inadequate information concerning the advantages of staying at home with infants, if they pay only a portion of the costs of their children's medical care (as with most types of health insurance), or if they have higher than socially optimal discount rates. Employers may also be less aware or supportive of the advantages of parental leave to dependents than of the corresponding benefits to the workers themselves. It is also frequently asserted that leave mandates decrease female unemployment and increase firmspecific human capital by reducing the need for women to change jobs, if they wish to spend time at home with young children [Kamerman 1988; Bookman 1991; Bravo 1991; Trycinski 1991]. Lacking some source of market failure, this argument is unconvincing. Employers and workers can always voluntarily negotiate maternity leave, mitigating the joblessness and retaining the specific investments. Moreover, with competitive labor markets, the groups most likely to use parental leave will pay for it by receiving lower wages, implying that females of childbearing age will continue to obtain lower and possibly reduced compensation if the benefit is mandated. 5 Entitlements that allow substantial time off work may cause employers to limit women to jobs where absences are least costly, thereby increasing occupational segregation, as Stoiber [1990] suggests has occurred in Sweden. Adverse selection under asymmetric information provides a potential source of market failure. A company voluntarily offering leave is likely to attract a disproportionate number of "high-risk" employees and be forced to pay lower wages. Persons with small probabilities of using the benefit will avoid these firms and so do without even socially optimal leave. 6 A government mandate eliminates the incentive for this type of sorting behavior and has the potential to raise welfare. 7 Companies in the United States rarely provided explicit paid maternity leave prior to the FMLA. Only 3 percent of full-time employees in private medium and large establishments (greater than 100 workers) were entitled to such leaves in 1993 and 1 percent of those working for small employers in 1992 [U. S. Department of Labor, Bureau of Labor Statistics 1994a, 1994b]. These low coverage rates could indicate that the costs of the entitlements exceed the benefits or that market 5. See Gruber [1994] for an excellent discussion of group-specific mandates and Summers [1989], Mitchell [1990], or Krueger [1994] for more general discussions of the economics of mandated benefits. 6. This is analogous to Rothschild and Stiglitz's [1976] argument for market failure in insurance markets. Aghion and Hermalin [1990] suggest that in some situations socially optimal parental leave might not be voluntarily provided to any workers. In their model, low-risk individuals signal this to employers by agreeing to contracts providing for little or no leave. High-risk workers sometimes do better by mimicking their counterparts, by taking positions without leave, than by revealing their propensity toward absenteeism. 7. The inefficiency of privately negotiated labor contracts under asymmetric information has been demonstrated across a variety of contexts. For example, McGuire and Ruhm [1993] indicate that employerdrug testing is likely to be excessive, and Levine [19911 and Kuhn [19921 argue that just-cause employment security regulations and advance notice of job terminations may be underprovided. imperfections limit their unregulated provision. Alternatively, most workers may have been able to take time off work through vacation, sick leave, or temporary disability policies, even without explicit maternity leave. 8 Parental leave mandates are likely to shift the labor supply curve of the groups most probable to use it to the right (relative to those workers less likely to take leave). 9 The demand curve simultaneously moves to the left. However, since leave benefits are paid primarily by the government in most European countries, demand only shifts to the extent that nonwage costs (e.g., expenses associated with hiring and training temporary replacements) increase. 10 Thus, the shift in supply is likely to be large compared with that in demand, implying that the relative employment of women will rise and their relative wages will fall in the new equilibrium. 11 Increased leave-taking could reduce work in the period immediately surrounding childbirth, even if leave entitlements raise overall employment. However, Klerman and Leibowitz [1997] illustrate that employment may increase even during this time span. The reason is that some persons who would otherwise have terminated their jobs to take more leave than previously permitted, may now find it worthwhile to return to work sooner in order to remain with their old employers. This occurs because the gap between desired leave duration and that offered by the firm decreases, while the benefits of maintaining the employment relationship (e.g., higher future compensation) are little changed. There could be additional "dynamic" effects. For instance, labor productivity will rise if parental leave increases firm-specific human capital by allowing individuals to return to their old jobs. This will shift the demand curve to the right, further increasing employment and attenuating or reversing the decline in wages. Alternatively, if human capital depreciates during lengthy leave periods, the employment increases will be smaller, and the earnings reductions larger than in the static case. II. PARENTAL LEAVE POLICIES IN EUROPE Legislated maternity benefits have a long history in Europe. The German Imperial Industrial Code of 1891 set maximum work hours and prohibited the employment of women within four weeks of childbirth. Amendments to the code in 1903 and 1911 increased the leave period to six weeks and 8. The Pregnancy Discrimination Act (PDA) of 1978 requires companies offering leave for temporary disabilities, which includes most medium and large establishments, to cover pregnancy and childbirth in the same way as other temporary disabilities. Several states have supplemented the PDA with stronger temporary disability laws or maternity leave mandates [Ruhm 1997]. During the 1986-1988 period, 73 percent of "employed" women in the United States with one-month old infants were on leave (and 41 percent on paid leave) rather than working, as were 41 percent (16 percent) of those with two-month old babies [Klerman and Leibowitz 1994]. 9. In particular, some individuals will increase their labor supply prior to having children in order to meet the qualification conditions for parental leave. I return to this point below. Mortensen [19771 makes an analogous argument with regard to unemployment insurance. 10. More precisely, this refers to the movement of the demand curve compared with groups not using leave. The demand for all types of labor may decline if the parental leave benefits are financed by payroll taxes levied on employers. 11. If the group-specific mandate is imposed in the presence of binding equal pay legislation or union rules that restrict wage reductions, female employment is likely to rise less (or may even fall), the decline in wages will be smaller, and the deadweight loss is likely to be larger [Gruber 1994]. supplied women with paid time off work in the two weeks before delivery. By the turn of the century there was discussion of providing maternity insurance in many European countries. 12 Most early legislation emphasized concern for the health of the child and mother. Prenatal and postnatal leave was typically compulsory, and income support or job-protection was seldom provided. The 1919 and 1952 International Labour Organization Maternity Protection Conventions recommended that women not be permitted to work during the six-week period following confinement. Payment during leave and rights to return to the old job were also advocated, but many countries did not adopt these suggestions until much later. 13 After the end of World War II, many nations that had recruited women into previously maledominated occupations wished to return them to the home [Moeller 1993]. The motivation for policies related to family allowances, protective legislation, and family-law reform was often to restore women to their "proper" roles as mother and wife [Frank and Lipner 1988]. In the postwar period some countries mandated compulsory pregnancy leave but failed to prohibit dismissal from