The economic consequences of family policies

Claudia Olivetti, Barbara Petrongolo 03 June 2017

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All high-income countries, as well as several developing countries, have policies in place to support work–family reconciliation, such as parental leave, childcare support, and flexible work arrangements, to name a few. The impact of these policy provisions on the labour market outcomes of parents, and especially mothers, is actively debated in both policy and academic circles. Proponents of family policies typically emphasise their contribution to gender equality, by enabling women to combine careers and motherhood, and sometimes their beneficial impact on child development. Opponents often warn against long periods of absence from work, which may be detrimental to women’s careers via both the loss of valuable work experience and possibly higher costs for employers to hire women of childbearing age.

How do policies and outcomes vary across countries? What works and what doesn’t? In recent work, we draw lessons from existing studies and our own analysis on the impact of parental leave and other forms of family intervention on female employment, earnings gaps and fertility (Olivetti and Petrongolo 2016).

At present, all OECD countries with the exception of the US have in place paid maternity leave rights around the time of birth (of about 20 weeks on average) and much shorter paternity leave rights (typically below two weeks). Following birth-related leave, either parent is entitled to parental leave, with lower income replacement ratios. Parental leave tends to be very long in Nordic countries (14 months in Sweden, 20 months in Norway, nearly 3 years in Finland), but much shorter or absent in the rest of Europe. The introduction of parental leave rights was followed, with long and varying lags, by other family-friendly policies such as public or subsidised child-care, part-time work or flexible working time, and in-work benefits for working parents. The rationale behind these policies was often to encourage fertility while limiting the career penalty of motherhood. Public spending on childcare is currently 0.7% of GDP on average across OECD countries, and between 1-2% in Scandinavia, France, the UK, and New Zealand. These countries also have relatively generous family benefits in cash or in-kind and a high proportion of employers offering flexible work time arrangements (OECD 2016).

Figure 1 summarises cross-country variation in parental leave available to mothers, and plots it against gender gaps in employment rates. Overall, countries with longer leave entitlements tend to be characterised by narrower employment gaps. Does this mean that more weeks of leave necessarily foster gender equity in the labour market?

Figure 1 Parental leave and employment gaps in OECD countries

Source: OECD (2016).

Progress in the evaluation of the impact of family policies on labour market outcomes has been challenged by two sets of issues. The first arises from the complexity of modern family legislation. Parental leave can vary in length, job protection, income support, and availability to either parent. The generosity of subsidised early years education and care may be means tested. Other provisions, such as family transfers and tax allowances to low-income workers with children, might also be in place. The recent introduction of family friendly practices (right to part-time, flexible working time) adds further elements to the picture. Clearly, there are interdependencies in the introduction and impact of each of these policies, which are missed by studying them in isolation. The complexity of each single form of intervention also makes it harder to cover the big picture without neglecting relevant details.

The second set of issues concerns endogeneity of intervention and the existence of unobservables that share in both policies and outcomes. A stronger female presence in the labour market raises the demand for interventions which help women to combine work and motherhood. More egalitarian gender roles may induce both higher female participation and family friendly legislation.

Cross-country evidence

One strand of the literature exploits the rich variation across countries (or geographic areas within a country) and the availability of internationally consistent data on a variety of labour market outcomes. Ruhm’s (1998) seminal work finds that short periods of entitlement (around three months) lead to a small rise in employment rates, with little impact on wages, while longer entitlements (of around nine months) lead to negligible additional impact on employment but sizeable negative impacts on wages. Employment effects can be generated by stronger labour market attachment during job-protected leave and the right of mothers to return to pre-birth jobs, but there are also entitlement effects for women who, though they wouldn’t otherwise participate, intend to accumulate work experience to later qualify for leave benefits. Detrimental wage effects after long periods of absence may be driven by loss of actual labour market experience and nonwage costs to firms.

We extend the approach of Ruhm (1998) and later work, bringing together data on 30 OECD countries over 45 years, covering gender outcomes in employment and earnings, fertility, and the expansion in several dimensions of family policies. Our findings suggest that job-protected leave entitlements up to 1.5 years are associated with better female employment and wage outcomes, likely allowing women to return to their pre-birth job, while not having much effect on fertility. However, longer and more generously paid entitlements may be detrimental to female employment, especially for the less skilled. For the college educated, longer parental leave seems instead to be associated with wider earnings and wage gaps virtually throughout the whole range of leave entitlement variation observed in our sample. The returns to job-specific experience for this group is plausibly higher than for the less skilled, and skilled women have more to lose from missed career advancement opportunities. The one indicator that is associated with more equal gender outcomes across the board is spending in early childhood education and care. Presumably, the availability of cheap substitutes to maternal care encourages female labour supply with positive, rather than negative, effects on the accumulation of actual experience. 

Cross-country studies provide a rich and suggestive picture, and – being based on country-level outcomes – take into account spillover effects of policy beyond the targeted population. However, causal inference based on a country-level panel may be delicate whenever policy adoption is itself a response to labour market trends, and the need for policy measures that are comparable both internationally and over time reduces the complexity of intervention to relatively coarse indicators.

Policy evaluations with micro data

Another strand of the literature has addressed these concerns by evaluating the causal impact of policy for specific countries by combining rich micro data – often social security records – and variation from natural experiments. Studies for Austria, Germany, and Norway (Lalive and Zweimueller 2009, Schoenberg and Ludsteck 2014, Dahl et al. 2016, respectively) tend to find that parental leave delays mothers’ return to work, with no discernible effects on their employment rates in the long run. Various factors may explain such discrepancies. First, the beneficial impact of maternity leave may be overestimated in cross-country studies in so far as exogenous shocks to participation induce family-friendly legislation. Second, widespread extensions to leave rights in most countries have inevitably shifted the focus of later studies based on micro data towards variations in parental leave at much longer durations. It might thus be possible that the availability of some job protection, relative to no protection at all, would ensure continuity of employment and discourage transitions out of the labour market, while further extensions would simply delay return to work without further gains in employment. Overall there is no compelling evidence that extended parental leave rights have a positive impact on female employment.

In several countries, parents returning to work after childbirth continue to receive state support in the form of subsidised or publicly provided child care and preschool programs. For the US, Cascio and Schanzenbach (2013) find only mild effects of the availability of pre-school (for four-year-olds) on maternal labour supply, while public subsidies for kindergarten provision, aimed at five-year olds, produce clearer employment gains for mothers. According to Gelback (2002), hours and employment gains mostly accrues to single mothers, with lesser effects detected for married mothers. Similarly, Lefebvre  et al. (2008) detect a sizeable impact of child care subsidies for four-year olds in Quebec, when combined with wider availability and high quality of service.

Havnes and Mogstad (2011) detect instead only tiny maternal employment effects of subsidised childcare in Norway, following a large-scale expansion in public childcare in 1975. Similar conclusions are drawn by Givord and Marbot (2015) for the French case, in which an average 50% subsidy to childcare spending only raised female participation by one percentage point. Besides crowding-out other forms of childcare, limited effects of subsidies are not surprising in a context with relatively high female participation and low childcare costs at baseline. Bettendorf et al. (2015) and Nollengerger and Rodríguez-Planas (2015) detect slightly stronger effects for the Netherlands and Spain, respectively.

Conclusion

In summary, while no obvious consensus on the labour market impact of parental leave rights and benefits emerges from the empirical literature, both the macro and micro literatures tend to find positive effects of subsidised childcare on female employment, although again gains appear more moderate based on micro-level evidence. The micro-level studies also find beneficial effects of in-work benefits on female employment, although these are typically sizeable only for single mothers. A potential common theme of our findings is that making it easier to be a working mother may matter more than the length of leave entitlements or the payments that new parents receive while out of the labour force.

References

Bettendorf, L J H, E L W Jongen and P Muller (2015), “Childcare subsidies and labour supply: Evidence from a Dutch reform”, Labour Economics 36: 112–123.

Cascio, E and D Whitmore Schanzebach (2013), “The impacts of expanding access to high-quality preschool education”, Brookings Papers on Economic Activity, 2(Fall): 127–92.

Dahl, G B, K V Løken, M Mogstad and K V Salvanes (2016), “What is the case for paid maternity leave?” Review of Economics and Statistics 98(4): 655–70.

Gelbach, J B (2002), “Public schooling for young children and maternal labor supply”, American Economic Review 91: 307–322.

Givord, P and C Marbot (2015), “Does the cost of child care affect female labor market participation? An evaluation of a French reform of childcare subsidies”, Labour Economics 36: 99–111.

Havnes, T and M Mogstad (2011), “Money for nothing? Universal child care and maternal employment”, Journal of Public Economics 95: 1455-1465.

Lalive, R and J Zweimüller (2009), “How does parental leave affect fertility and return to work? Evidence from two natural experiments”, Quarterly Journal of Economics 24: 1363-1402.

Lefebvre, P, P Merrigan and M Verstraete (2008), “Dynamic labour supply effects of childcare subsidies: Evidence from a Canadian natural experiment on low-fee universal child care”, Labour Economics 16: 490-502.

Nollenberger, N and N Rodríguez-Planas (2015), “Full-time universal childcare in a context of low maternal employment: Quasi-experimental evidence from Spain”, Labour Economics 36: 124–136.

OECD (2016), Family database.

Olivetti, C and B Petrongolo (2017), “The economic consequences of family policies: Drawing lessons from a century of legislation across OECD countries”, Journal of Economic Perspectives 31: 2015-230.

Ruhm, C (1998), “The economic consequences of parental leave mandates: Lessons from Europe”, Quarterly Journal of Economics 113: 285-317.

Schönberg, U and J Ludsteck (2014), “Expansions in maternity leave coverage and mothers' labor market outcomes after childbirth”, Journal of Labor Economics 32: 469-505.

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Topics:  Gender Labour markets

Tags:  family policies, parental leave, maternity leave, childcare, labour, families, entitlements, work

Professor of Economics, Boston College

Professor of Economics, Queen Mary University and Research Associate, Centre for Economic Performance, LSE

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