Parental Leave, Worker Substitutability and Firms’ Employment

Abstract Motherhood and parental leave are frequent causes of worker absences and employment interruptions, yet little is known about their effects on firms. Based on linked employer-employee data from Germany, we examine how parental leave absences affect small- and medium-sized firms. We show that they anticipate the absence with replacement hirings in the six months before childbirth. A 2007 parental leave reform extending leave absences reduces firm-level employment and total wages up to three years after childbirth, driven by firms with few internal substitutes for the absent mother. However, we do not find longer-term effects on firms’ employment, wage bills or likelihood to shut down. The reform led to an increase in replacement hirings, but firms did not respond to longer expected absences of mothers by subsequently hiring fewer young women. Overall, our findings show that anticipated, extended parental leave does not have a lasting impact on firms.