Abstract: 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.
Keywords: human capital; labor market equilibrium; parental leave policies; fertility; temporary separations
JEL Classification: E24; E60; J2; J3