Parental Leave from the Firm’s Perspective

Abstract: A growing body of research has investigated the individual cost and benefits of generous parental leave policies for women, but the firm-side effects have been underexplored. In this study, we investigate firms’ responses to the introduction of parental leave policies with respect to different margins of the labor input. We focus on whether and how firms adjust the gender composition of their workforce when the opportunity costs of certain types of worker groups rise. We exploit the parental leave reform in Norway in 1993, and rich administrative matched employer-employee population data. We observe that right after the reform, there is substitution away from women with young children. The substitution effects moderate over time. Treatment effects are heterogeneous across small and large firms. Overall, our results suggest unintended consequences of parental leave policies, when considered from the lens of a firm.