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Impact of parental leave on companies

Published 10 November 2021 in Audio articles • 7 min read • Audio availableAudio available

Taking time off to give birth has scant effect on small companies in Denmark

Most of the existing evidence on the effectiveness of family leave policies stems from research on the impact on the families concerned – mothers, fathers, and their offspring – rather than the effects and costs on employers or fellow workers. By contrast, a policy brief by the UBS Center examines the consequences of a female worker giving birth and taking parental leave on her employer and co-workers.

Focusing on Denmark, a wealthy country with generous parental leave benefits, it shows there is little evidence of negative effects on either the employing company or co-workers. Output, labor costs, profitability, and company survival are largely unchanged. While co-workers experience temporary increases in hours, earnings, and the likelihood of retention, there are no significant alterations in their workplace well-being (as measured by sick days). 

This limited impact is due to most companies’ ability to compensate for parental leave by hiring temporary staff and raising other workers’ hours. Parental leave may, however, have negative effects on a small subset of companies who are less able to use existing staff to compensate.

Parental leave for workers around childbirth is common in high-income economies. Strangely, however, little research has been conducted into the impact of such temporary disruptions on the performance of the employer concerned. While large companies may be expected to adapt to such absences largely unnoticed, smaller employers with fewer than 30 workers could suffer significant inconvenience and negative consequences. Indeed, public debate about the possible negative impact of parental leave has generally focused on smaller companies. 

The theoretical background  

 Economic theory suggests that, if labor markets are frictionless and competitive, the employer would be able to substitute any lost labor input with an equivalent worker without incurring any additional costs. As labor is replaced at the market rate, no effect on fellow workers or the company output should be expected. Assuming employers suffer no costs related to paid leave, company costs (and thereby profits) should also be unaffected. 

In reality, expensive and time-consuming searches, or other frictions, make such predictions much more nuanced. The affected company may not be able to replace the absent worker perfectly or may only be able to do so with a lag or after suffering extra expenses. If the company fails to replace the lost worker immediately, fellow workers’ productivity will change, depending on whether they are complements or substitutes in the production relative to the lost worker. 

Fellow workers who are substitutes may witness a rise in productivity. The opposite would apply to those who are complements. Depending on how wages and employment are determined, such changes in productivity would imply shifts in co-workers’ wages, hours, and/or unemployment risk. 

For the company itself, output would decrease if the absent worker were not replaced immediately, while profits would tend to fall due either to lower output or higher costs. In extremis, a company with the option to exit the market in response to lower profits could end up closing and laying off its entire workforce. In other words, if the labor market is characterized by frictions, the absence of one worker could cause significant damage to the company. 

The example of Denmark demonstrates that parental leave has no negative impact on firms’ output, gross profit, closure or on existing workers’ sick days. This is despite the fact that a new mother typically takes almost 40 weeks of job protected leave with wage replacement. In Switzerland, for example, mothers can only take 14 weeks of paid maternity leave. 

The worker’s absence due to parental leave can in part be offset by the additional commitment of existing workers. However, especially for smaller companies, good preparation is crucial as they generally have a smaller resource base to compensate for parental leave. 

Because of the nature of the worker absence, companies can reduce costs by planning ahead, e.g., by reducing worker turnover. Early announcement of the future absence helps to prepare the company optimally for the changeover. A regulation like in Denmark to announce the pregnancy at least three months before birth is therefore desirable. 

Father reading a book on the sofa with his baby daughter sleeping on his lap. Output, labor costs, profitability, and company survival are largely unchanged.Father reading a book on the sofa with his baby daughter sleeping on his lap (Getty Images).

A word about methodology 

The main reason why there has been so little research on the impact of parental leave on employers and fellow workers stems from the need for comprehensive data linking company and worker outcomes to information on fertility and leave taking. Identifying casual effects is an extra challenge. 

In the research summarized here, the impact of a woman’s giving birth and taking leave was studied in terms of its effect on companies’ demand for labor, costs, overall performance, and on co-workers’ labor outcomes (in terms of hours, retention, and earnings), where companies were reimbursed for the costs associated with wage replacement benefits during parental leave. 

These adjustments appear very effective in compensating for the worker on leave. Sophisticated statistical tools allowed comparisons to be made between companies where a female worker gave birth and took parental leave and a control group of comparable companies with a female worker who did not give birth over the same time period. 

The study used detailed administrative data on Danish companies and workers for the period 2001 to 2013. The information on employment relationships came from annual administrative data company pension contributions. 

Information on company performance was calculated on the basis of the value-added tax returns where the reporting of total sales and purchases is obligatory if the revenue exceeds a defined value. Gross profitability was proxied by subtracting purchases and total wages (excluding leave) from total sales. 

The female workers analyzed for both the treatment and control groups were limited to women who had been at the firm for at least one year and who were between 19 and 33 years in the baseline year, i.e, two years before the potential childbirth. 

What the data show 

While many of these programs benefit mother and their children, critics argue such absences can impose substantial costs on employers, including wage replacement benefits, as well as indirect costs such as for recruiting and training substitutes. Ultimately, such perceived burdens could make employers more reluctant to recruit and promote women of childbearing age. 

In reality, the detailed research showed that the costs of parental leave are negligible both for companies and co-workers. Companies experiencing a worker on parental leave are generally good at compensating for the absent worker by redistributing work among other workers and/or by hiring temporary workers to fill any gaps.

After taking into account reimbursement from the Government (UI benefits) and the parental leave fund, there was no significant increase to the company’s total wage bill

A female worker in a small Danish company who becomes pregnant and gives birth takes about nine and a half months of parental leave. To compensate for this substantial loss of labor input, employers temporarily hire more workers and slightly raise the retention rates and working hours for remaining workers – particularly those performing similar functions to the person on parental leave. When 1% of the workforce gives birth and goes on leave, existing co- workers’ hours increase by 0.10% in the event year. 

Additional cost burdens were only minimal. After taking into account reimbursement from the Government (UI benefits) and the parental leave fund, there was no significant increase to the company’s total wage bill. Nor was there any notable deterioration in the company’s performance. The impact of the absence on fellow workers was also negligible. 

However, the research did suggest some companies faced negative adjustment costs. A small number of companies that had no direct replacement for the worker on leave were constrained in how to adjust, as they could not just raise the hours of workers in similar occupations as the woman on leave. Accordingly, this small group of companies seemed to experience some negative effects of having a worker on parental leave, as they seemed to have a harder time to hire a replacement worker. 

While true that absences due to parental leave differ from most other worker absences in being highly anticipated, giving companies more scope for planning, the impact for this small number of companies highlighted the importance of companies’ general good ability to adjust their labor inputs when having a worker on leave. Even if the costs are negligible overall, parental leave can be burdensome for some particularly vulnerable employers, while harmless for the overwhelming majority. 

Public expenditure on maternity and parental leaves

Length of parental leaves compared to benefits awarded

Authors

Anne Ardila Brenøe

Larsson-Rosenquist Foundation Assistant Professor of Child and Youth Development with a focus on breastfeeding, Zurich 

 

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