A general equilibrium analysis of parental leave policies by

Despite mandatory parental-leave policies being a prevalent feature of labor markets in developed countries, the aggregate effects of leave policies are not well understood. In order to assess the quantitative impact of mandated leave policies in the economy, we develop a general-equilibrium model of fertility and labor-market decisions that builds on the labor market 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. Mandated leave policies have important effects on fertility, leave taking decisions, and employment rate of mothers with infants. These effects are driven by how policy affects bargaining in job matches: Young females anticipate that there are some states in the future in which their threat point in bargaining will be higher. Because the realization of these states depend on the decisions of females to give birth and take a leave, the change in the threat point induced by the policy subsidizes fertility and leave taking. Unpaid parental leaves have a small impact on the time that mothers spend with their children but paid parental leaves can be an effective tool to encourage mothers to spend time with their children after giving birth.