Welfare Reforms and the Division of Parental Leave

Thomas H. Jørgensen and Jakob E. Søgaard's CESifo working paper, featured in the latest CESifo newsletter.

The working paper studies how the 2019 EU directive can be implemented to better achieve a more equal sharing of the burden of raising children, and how financial incentives influence fathers' decision on how long to take parental leave. Following the 2019 directive on Work-Life Balance, all EU member states must by 2022 provide each parent 9 weeks of paid (non-transferable) parental leave.

This research paper studies how the 2019 directive can be implemented to better achieve a more equal sharing of the burden of raising children.

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?

They study how the design of parental leave benefits affects how much parental leave parents actually take, and they 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, they estimate a model of parent’s willingness to divide parental leave between husband and wife.
They specifically identify the key parameters of the model from observed bunching around kink points in the household budget sets.

They use their 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, they 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.