Welfare Reforms and the Division of Parental Leave

Key Issue

There has been a growing political interest in welfare reforms that incentivize parents to share the burden of child rearing, and particularly in earmarked (non-transferable) parental leave. A key example is the recent 2019 EU directive on Work-Life Balance for Parents and Carers, which mandates 9 weeks of earmarked leave in all European countries. But how does the broader design of parental leave benefits affect parents’ division of parental leave and household welfare?

Approach and Methodology

We study how the design of parental leave benefits affects how much parental leave parents actually take, and we take a first step toward understanding the societal desirability for such reforms. Utilizing detailed register data together with a careful modeling of large changes in household-level economic incentives created by the Danish parental leave system, we estimate a model of parent’s willingness to divide parental leave between husband and wife. Specifically, we identify the key parameters of the model from observed bunching around kink points in the household budget sets.

Key Findings and Conclusions

We use our model to conduct several counterfactual policy simulations, including the introduction of the EU-mandated 9 weeks of earmarked leave. A key finding from these simulations is that the effect of earmarked leave on fathers’ use of parental leave critically depend on the replacement rate they face. Hence, introducing earmarked leave in a low replacement rate setting is less likely to achieve a goal of greater gender equality. Finally, we discuss the social costs of different policies and find that an efficient way to increase fathers’ use of parental leave is a mix of earmarked leave and relatively high replacement rates.

Authors

Thomas Høgholm Jørgensen

Jakob Egholt Søgaard

Publication

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