Parental Leave, Worker Substitutability, and Firm’s Employment

Abstract

Motherhood and parental leave are important sources of worker absences and employment interruptions in firms, yet we know little about their effects on firms. Based on linked employer-employee data from Germany, we examine how firms handle such absences and how more generous leave benefits affect firm-level employment and hirings decisions. Focusing on small- and medium-sized firms, three key findings emerge: First, when firms have few internal substitutes available, they hire more external replacements and mothers take shorter leave. Second, more generous benefits reduce firm-level employment in the short term, which is driven by firms with few internal substitutes. Third, firms do not respond to more generous benefits by hiring fewer young women, even when they have few internal substitutes. Negative effects of parental leave and its extension are thus concentrated in firms with few internal replacements, though a leave extension does not affect the composition of new hirings.

Keywords: Parental leave, worker absences, worker substitutability

JEL Classification: J16, J18, J24