Mandated Maternity Leave and Labour Substitution: Firm- Level Evidence from India

Using nationally representative data from the Annual Survey of Industries, we examine the effects of India’s Maternity Benefit (Amendment) Act, 2017, which extends the paid maternity leave from 12 weeks to 26 weeks on firms’ hiring decisions and gender-specific employment outcomes. We use the institutional variation of the policy mandate, which applies only to firms with 10 or more employees, to define treatment and control firms. Our results reveal that firms respond to the mandate primarily through labour substitution, i.e., replacing female workers with male workers rather than bearing the increased cost of female employment. We find a decline of 8.4% in female workers and 9.5% in female mandays worked, accompanied by an increase of 2.6% in male workers and 2.1% in male mandays. This substitution is concentrated in industries with high female employment shares, while firms in low female-share industries show no female employment effects but exhibit positive spillovers to male wages. Firm output and profit are unaffected, indicating that male workers serve as effective production substitutes. These findings imply well-intentioned maternity leave policies can inadvertently reinforce gender labour market disparities.