Optimal parental leave subsidization with endogenous fertility and growth

Abstract

We examine the growth and welfare effects of parental leave subsidization in a life-cycle dynastic model with human capital externality. Such externality causes higher fertility, less parental time and expenditure on child human capital, and lower growth and welfare than the efficient levels. Efficient policies require subsidizing work leave, which includes parental leave, and labor income financed by a lump-sum tax. Calibration based on the U.S. data implies that a fully-covered leave duration of 7.8 weeks per parent financed by an increase in labor income tax would increase the annual growth rate by 0.06 percentage points and welfare by 0.027%.