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A General Equilibrium Analysis of Parental Leave Policies

  • Andres Erosa
  • Luisa Fuster
  • Diego Restuccia

Despite mandatory parental leave policies being a prevalent feature of labor markets in developed countries, their aggregate effects in the economy are not well understood. To assess their quantitative impact, we develop a general equilibrium model of fertility and labor market decisions that builds on the labor matching framework of Mortensen and Pissarides (1994). We find that females gain substantially with generous policies but this benefit occurs at the expense of a reduction in the welfare of males. Leave policies have important effects on fertility, leave taking decisions, and employment. These effects are mainly driven by how the policy affects bargaining -- young females anticipate future states with higher threat points induced by the policy. Because the realization of these states depend on the decisions of females to give birth and take a leave, leave policies effectively subsidize fertility and leave taking. We also find that generous paid parental leaves can be an effective tool to encourage mothers to spend time with their children after giving birth.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-385.

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Length: 41 pages
Date of creation: 30 Dec 2009
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-385
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  4. Andres Erosa & Luisa Fuster & Diego Restuccia, 2005. "A general equilibrium analysis of parental leave policies," Working Paper 05-08, Federal Reserve Bank of Richmond.
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