On the effect of parental leave duration on unemployment and wages

- Parental leave duration differs significantly across OECD countries.
- We introduce parental leave policies in a labor search and matching model.
- We study the effect of leave duration on wages and unemployment.
- We focus on the job creation channel and provide empirically testable results.
- The results hinge on the net benefit of the policy for both workers and firms.

We introduce parental leave policies in a labor search and matching model and study the effect of leave duration on unemployment and wages. We show that the effects are ambiguous and depend on whether the net benefit of the leave for the worker relative to her bargaining power is larger than the net benefit of the leave for the firm relative to its bargaining power. Our results suggest that simulated labor market outcomes in search and matching models may be sensitive to the calibration of these key parameters of the model.