Costs of Employment and Flexible Labor Demand: Evidence from Maternity and Parental Leave Reforms

This study examines the effects on workers from the labor-demand response to the costs of mandated maternity and parental leave programs. Japan introduced generous parental leave policies in the 1990s, but for many years, firms still had to pay the social insurance payments during leave, amounting to 13 percent of earnings. A series of reforms occurring in 2000, 2001 and 2014 which gradually reduced these costs to zero. This paper uses this quasi-experimental variation in the cost of female employment to measure the labor demand response. I focus on two key outcomes: starting wages of women of child-bearing age and the probability they are hired on permanent contracts. I find that a 100 thousand yen (approximately $1,000 USD) decrease in the costs of employment during leave increases the probability of starting on a permanent contract by 1.6 percentage points, and increases starting pay by 3.3 percent. In contrast with previous studies, the universal social insurance program setting I study allows me to separate the effects of changes in costs from endogenous responses by workers and firms to the available benefits. These findings have important implications for other countries mandating similar benefit schemes.