Family Leave Programs: Employer Responses and the Gender Wage Gap

Job-protected family leave and benefits may have unintended consequences when we consider firms’ equilibrium responses. In the presence of labor market frictions, employers might incur adjustment costs upon workers’ absence and turnover. We quantify the costs faced by firms that employ workers of varying durations of family-related absence. Exploiting exogenous variations from a 3-month parental leave expansion in Sweden in 1989, we find that women worked 2.5 months less after childbirth whereas men worked only 1 week less. Moreover, the reform increased the probability that women separate from their pre-birth employers. Women with fewer substitutes within the workplace took up less leave and shifted take-up to their spouses, suggesting that workers internalize their employer’s adjustment costs. We find that firms with greater exposure to the reform responded to the labor shortage by hiring temporary workers and increasing incumbents’ hours. The total wage cost of these adjustments was over and above the salary for the person on leave, suggesting that such reorganization is costly. Finally, we document substantial heterogeneity in firms’ adjustment strategies by the ease with which replacement workers can be found, indicating several sources of frictions associated with worker absence and exits. Joint with Arizo Karimi and Pengpeng Xiao.