Improving Paid Parental Leave through Income Contingent Loans

It is argued in this chapter that income contingent loans (ICL) may provide an efficient and equitable option for extending taxpayer funded paid parental leave (PPL) schemes, which may be otherwise limited in duration and payment amounts due to fiscal pressures. As is the case for higher education, a lack of liquidity and market failure can prevent families from financing an extension of leave beyond that typically offered in most OECD countries through taxpayer funded PPL. It is argued that an ICL could provide consumption smoothing and encourage participation, yet taxpayer costs could be kept low (if not zero) provided scheme design mitigates against adverse selection and moral hazard. It is further argued that an appropriately designed scheme could be welfare enhancing to parents even in the absence of taxpayer subsidies.