Employer vs government parental leave: Labour market effects

Abstract

A relatively large number of firms in Australia and in the US offer employer-funded parental leave to their employees. We introduce employer-funded parental leave in a theoretical labour search and matching model. Firms choose the duration of paid parental leave offered to prospective employees. Matched firms and workers then negotiate wages through a Nash bargaining process. We show that employer-funded leave allows firms to pay lower wages. In this context, extending government-funded parental leave reduces the benefits of employer-funded leave to firms, reducing total leave duration. It also affects equilibrium wages and employment. We calibrate the model using Australian data. We show that increases in both government-funded leave duration and replacement rate can be welfare improving and, in particular, the welfare effects of government leave duration display an inverted U-shape.