The Signaling Role of Parental Leave Author: Linh T Tô Abstract: I examine the signaling role of workers’ parental leave choices theoretically and empirically. Motivated by the correlation between longer parental leave duration and a higher labor market penalty associated with the event of childbirth, the model posits that firms infer private information about future labor market choices or productivity of mothers through their choice of forgoing paid leave to return to work early. In equilibrium, mothers take into account firms’ beliefs in deciding their leave choices, with direct consequences on their wages. The model delivers distinct predictions of the signaling channel of parental leave when there is an exogenous change in the maximum allowed paid leave duration. The empirical tests leverage unanticipated parental leave extensions in Denmark and administrative longitudinal data consisting of labor market information and precise leave duration. Consistent with the model’s predictions, the leave extension (1) shifts up the leave distribution of mothers for whom the previously lower maximum duration would not have been binding, (2) has a positive wage impact on mothers who would have pooled at the maximum allowed leave before the extension but not after the extension, and (3) has a negative wage impact on mothers who would have pooled at the maximum allowed leave both before and after the leave extension. The results emphasize that relative rather than absolute leave duration can have direct long-term labor market consequences.
The Signaling Role of Parental Leave
The Signaling Role of Parental Leave
The Signaling Role of Parental Leave
The Signaling Role of Parental Leave Author: Linh T Tô Abstract: I examine the signaling role of workers’ parental leave choices theoretically and empirically. Motivated by the correlation between longer parental leave duration and a higher labor market penalty associated with the event of childbirth, the model posits that firms infer private information about future labor market choices or productivity of mothers through their choice of forgoing paid leave to return to work early. In equilibrium, mothers take into account firms’ beliefs in deciding their leave choices, with direct consequences on their wages. The model delivers distinct predictions of the signaling channel of parental leave when there is an exogenous change in the maximum allowed paid leave duration. The empirical tests leverage unanticipated parental leave extensions in Denmark and administrative longitudinal data consisting of labor market information and precise leave duration. Consistent with the model’s predictions, the leave extension (1) shifts up the leave distribution of mothers for whom the previously lower maximum duration would not have been binding, (2) has a positive wage impact on mothers who would have pooled at the maximum allowed leave before the extension but not after the extension, and (3) has a negative wage impact on mothers who would have pooled at the maximum allowed leave both before and after the leave extension. The results emphasize that relative rather than absolute leave duration can have direct long-term labor market consequences.