The Impact of Parental Leave Policy on Child-Rearing and Employment Behavior: The Case of Germany

For a long time, Germany has implemented a complex family policy targeted at maternal protection and child-rearing. A family with a newborn is entitled to maternity leave benefits, parental leave benefits, child benefits, a child tax allowance, and additional household benefits based on the number of children. The benefits are almost universal in Germany. The eligibility criterion is the parent’s German or European citizenship and a settlement permit or a residence permit with at least three years’ past employment in Germany.

The maternity leave system consists of a period of 14 paid weeks, typically divided into six weeks before childbirth and eight weeks afterward. During maternity leave, mothers are not allowed to work but are insured against dismissal. They also receive maternity benefits (Mutterschaftsgeld) – a net government transfer of up to 13 euros per day and additional coverage equal to the net income if the woman is eligible for social insurance. Employed women without government insurance receive a one-time maternity allowance of up to 210 euros

http://ec.europa.eu/employment_social/missoc/db/public/compareTables.do?lang=en

The parents receive an untaxed allowance (Kindergeld) until the child’s 18th birthday. For the first and second child, this consists of 184 euros, with a slight increase to 190 euros for a third child and to 214 euros for each child thereafter. The parents can deduct part of the income necessary to maintain a child from their tax return. Low-income households

Income up to 900 euros per couple or 600 euros per single parent.

The German paid-leave system was established in the mid-1950s when mothers have been entitled to job-protected paid leave 6 weeks before childbirth and 8 weeks after childbirth.

The following description of changes in the paid leave system is based on Schönberg and Ludsteck (2014).

Under this original system, a parent could share job-protected parental leave of up to three years (Elternzeit). During parental leave, the parent who stayed at home (or worked fewer than 30 hours per week

It is equivalent to reduced full-time work in Germany.

Even though fathers became eligible for parental leave in 1986, the male take-up ratio of the leave was insignificant. Parental leave was effectively maternal leave, and child-rearing was considered a traditional maternal activity within the “bread-winner” household model. German mothers delayed their return to work, and the availability to take longer leave weakened their labor force attachments (Schönberg and Ludsteck, 2014; Geyer and Steiner, 2007; Ondrich et al., 2003).

Negative trends in reproduction and the low labor market participation rate of mothers with children younger than three years

For instance, 48% in Germany compared to 77% in Sweden (OECD 2006).

The new parental leave system was established at the end of 2006 and took effect for children born after January 1, 2007. The main changes in the reform were financial. Under the new system, the means-tested child-rearing benefit (Erziehungsgeld) has been replaced by the parental allowance (Elterngeld), which accounts for 67% of the rearing parent’s net labor income per month. The benefit is calculated on the basis of the average labor earnings 12 months prior to the birth. If a parent caring for a child was economically inactive prior to the child’s birth, she (he) receives a flat minimum of 300 euros per month (3,600 euros per year). This minimum is also paid to those whose parents’ benefits would otherwise be less than 300 euros (part-time employees, those with a mini job, low earners). The benefit is truncated at 1,800 euros per month (21,600 euros per year), meaning that a parent with prebirth monthly net labor earnings more than 2,700 euros can get only the maximum payment. The benefit replacement rate increases to 100% if the child-rearing parent’s net income is less than 1,000 euros per month.

Another important change in the parental leave legislation is the cutoff in the duration of payment. Parental leave payments are granted for 14 months if both parents share the child-rearing and for 12 months in a single-carer household. The condition to work no more than 30 hours a week remains unchanged, but the reduction in the amount and duration of benefits makes part-time employment less attractive. In 2010, approximately 2%–9% of mothers were employed part-time while receiving benefits.

The reform was designed with various goals in mind. First, it aims to provide substantial financial support to families with children younger than one year, targeting middle- and high-income households.

Huebener et al. (2016) provided a detailed discussion of the critics of the political shift in the distribution targets.

As Spiess and Wrohlich (2008) point out, the main idea of the 2007 reforms was to move the design of the existing parental system toward the Scandinavian model, in which family policy supports the “dual-earner household.” There was a belief among German politicians that the Scandinavian model, with its high supply of publicly funded daycare and its generous parental leave system, promotes higher employment rates among mothers with young children, as well as higher fertility rates due to policies that reduced family income losses after childbirth.

According to administrative statistics, the take-up ratio was about 96% of all mothers between 2007 and 2010, with the average duration of parental leave almost a full period of 12 months. The average amount of benefits was also increasing. Comparing the simulated pre-and postreform benefits, Raute (2019) showed that the financial gain in benefits was continuously increasing in the postreform period.

The administrative data also report a significant increase in the take-up ratio of parental leave by fathers. In the first year after the reform, the share jumped from 2.5% to 15%. It increased continuously and was more than 34% in 2014. However, Kluve and Tamm (2013) showed that the higher participation in parental leave did not translate into significant involvement of the father in child-rearing. Most of the fathers received the benefit during the two months that could be added to the mother’s 12 months and then returned to work.

The German childcare system represents a universal mixed-market provision by public institutions and different types of non-state providers, such as religious institutions, private nonprofit organizations, commercial daycare centers, nannies, childminders, and family daycare. While public centers are under municipality or local-authority control, private nonprofit providers belong to welfare organizations. Centers run by churches are part of the public market. The owners of commercial centers are entrepreneurs or companies providing childcare services for employees. According to the survey “Children and Personnel in Child-Care Centres”,

The data are a part of the annual “Child and Youth Welfare Survey” collected by the German Federal Statistical Office.

The German childcare market is characterized by price rationing. The local communities that finance and run the majority of public childcare institutions set their fees based on household income and the child’s age.

The privately subsidized institutions use a similar scheme.

Since public childcare is relatively cheap, there is a high demand for slots. It is accompanied by low availability and high heterogeneity across Eastern and Western Germany, in particular for children younger than three years. Haan and Wrohlich (2011) showed that public childcare slots were available to only 8% of this age category in Western Germany in 2006 but to 40% of this age category in Eastern Germany.

Eastern Germany inherited the childcare system from the former German Democratic Republic, where family policy stimulated maternal employment.

In recent years, Germany has put substantial effort into increasing public childcare provision. The 2005 federal law regarding day-care expansion (Tagesbetreuungsausbaugesetz) established extra funding for additional childcare slots in public facilities. In particular, it focused on two groups: children younger than one year and younger than two to three years. The 2008 federal law (Kinderförderungsgesetz) continued enhancing the states’ investment in childcare infrastructure. The principal goal was to achieve coverage of 35% of all children younger than three years by 2013. It also guaranteed the parents’ legal right to the daycare slot for children aged one year and older from August 2013, unconditional on parents’ employment status or income. All of these efforts resulted in an increase in the average attendance rate for children younger than three years, from 13.6% in 2006 to 32.7% in 2016. Table 1 reports the dynamics of childcare coverage in terms of the percentage of all children younger than three years who attend childcare at the state level. We can see that the demand for slots is higher than the supply for all states (see Table 2

The administrative data on childcare demand are available from 2006 onward and for childcare supply are available only from 2012.

Under the new parental leave system, mothers might respond differently to the introduced financial incentives, depending on the child’s age and the income status of the household. Kluve and Tamm (2013) distinguished between two groups in the population of mothers entitled to the new benefits. The first group consisted of low-income mothers who were entitled to benefits under both the old and the new regimes. For them, the policy reduced the overall income related to the leave payments (the same payment over a 12-month shorter period). We might expect that after the termination of payments, mothers would return to work to adjust to the income loss during the next 12 months.

The second group consisted of mothers who did not receive any benefit under the old system. Now, they are entitled to a payment that partially covers the household’s income loss related to maternity. We might expect a drop in mothers’ employment rate during the child’s first year. Once the payments expire, the effect becomes ambiguous. On the one hand, the standard labor supply model (see Klerman and Leibowitz, 1999) predicts a positive impact of the policy on female labor force participation. An increase in the amount of benefits and a shorter payment period generate a sizable income decrease, thus creating a strong incentive to maintain the household income level by returning to work (income effect). On the other hand, before the reform, these mothers did not get anything; now, though, the payment may allow smoothing of consumption and an increasing in the reservation wage, thus postponing mothers’ return to work (wealth effect). Overall, the effect of the reform might be ambiguous during the second year after childbirth.

The reform did not introduce any changes in benefit entitlements in the last year of job-protected parental leave. Thus, the possible adjustment in employment behavior that we might observe during third or fourth years is related to decisions made in the first two years after childbirth.

The mechanism discussed earlier relies on the assumption that a mother can return to work immediately after making her decision. In practice, she needs to find a substitute for her childcare time. Nonparental child care may include different options, from paid daycare centers to unpaid care by relatives, but it should be available and affordable for a family at the moment of decision-making. Following Laroque and Salanié (2014), I consider a mother who maximizes her utility function in consumption (working hours and purchasing child care) and leisure (implicitly includes the option of taking care of the child herself), subject to budget and time constraints. The availability of subsidized child care loosens up the budget constraint. Depending on her preferences and whether a substitution effect dominates an income effect, a mother might respond by having a higher demand for subsidized child care and an increase in her employment. Then, the restricted supply of public child care and the shortage of other alternatives (private market or informal childcare) could make the maternal labor supply too expensive for the household.

Another consideration is related to the hours during which child care is available. In Germany, the public childcare slots exist in the following modes: part-time (less than 25 hours per week), extended part-time (between 25 and 35 hours per week), and full-time (more than 35 hours per week). Only a half of all enrolled children in 2012 were in full-time slots; 21% were in part-time slots and 27% were in extended part-time slots (BMFSFJ, 2017). Therefore, a mother can face difficulties in adapting her work schedule to the childcare facility’s hours of operation. The cultural context also matters. In a society in which child-rearing is traditionally considered a maternal activity, the financial incentives for mothers to return to work earlier do not necessarily translate into higher employment.

Summing up, the effect of the parental leave policy on maternal employment might be ambiguous for different reasons. Whether there is a positive shift in maternal employment depends not only on a mother’s preferences but also on the constraints she faces in finding a substitute for her childcare time. The existence of considerable excess demand for subsidized child care is a potential constraint to the reform implementation. Since the private childcare sector is particularly expensive and cannot be regarded as an alternative to the public sector, women face an important constraint when making the decision regarding their labor participation.

The empirical analysis is based on data from the GSOEP, a longitudinal household survey that collects information on demographic and socioeconomic characteristics from a representative sample of German private households.

For more detailed information, see Wagner et al. (2007).

To analyze the effects of the parental leave reform on childcare and return-to-work behavior, I used the survey’s detailed information on the childcare time allocation of mothers with newborns. The data allowed me to identify the usage of child care from public institutions, private institutions, and/or relatives. In addition, since 2003, the survey has been collecting detailed information on the various characteristics of newborn offspring (2002 and subsequent birth years) using the “Mother and Child” questionnaire, which covers such issues as time of pregnancy, initial motherhood evaluation, health and child care of newborns, and the support given by a partner.

I constructed the dataset using waves for 2001–2015.

Since the ultimate reform related to family policy took place in 2000, I assumed that the only expected impact on mothers’ employment decisions comes from the changes in 2007.

The objective of the analysis was to estimate whether the reform had a positive impact on labor participation during the first years of motherhood controlling for childcare decisions. I followed each mother up to 48 months after giving birth and considered her labor force participation and childcare decisions during the first three years of job-protected parental leave and the fourth year, when the parental leave right expires.

Monthly information on employment, periods of maternity leave, and a child’s birth date allowed me to define when a woman returns to work. I considered only the first transition into employment. To compare the reform effects for different margins of labor supply, I considered various outcomes for each year of motherhood:

To determine whether a mother is the main childcare provider, I used the GSOEP information on the type of childcare used. The questionnaire allowed me to identify whether a family uses a public childcare slot and whether the time that the child spends in a childcare institution is sufficient for a woman to work full-time or part-time. In addition, I checked whether a family uses the help of a paid childminder controlling for the number of hours. The final variable cc_it is a dummy variable where cc_it = 1, if the formal number of hours a child of mother i at year t spends at paid child care, provided by both public and private institutions, is sufficient for mothers’ employment.

The survey also provides information about additional help from the mother’s partner, parents, and other relatives or friends, but the data on how many hours people other than the mother look after the child are restricted. I created an informal childcare variable equal to 1 if a woman gets any help from her partner, grandparents, relatives, and friends.

To account for the childcare availability constraint discussed earlier, I constructed a variable that measures the provision of childcare for children younger than three years at the regional level. The childcare coverage rate ccr_jt is defined as the percentage of children of this age in formal child care region i in year t.

The calculations are based on the German administrative child care (“Statistik der Kinder- und Jugendhilfe”) and population (“Bevölkerungsstand: BevölkerungnachGeschlecht und Altersgruppen”) data for 2006–2015. Information on childcare coverage before 2006 is not available. I used the 2006 values as a reference for the period 2002–2005 since the childcare provision had not passed through any reforms in these dates.

I considered different time windows around the reform implementation: 2006–2007, 2005–2008, and 2002–2011. Descriptive statistics for all dependent variables and sample periods are presented in Table 3.

Table 3 reports the descriptive evidence of differences in women’s labor participation and childcare decisions before and after the reform implementation for various time windows around the reform. We do not observe any differences in mothers’ labor force participation for the samples 2006–2007 and 2005–2008. The share of employed women during the second year of motherhood significantly increased in the postreform period only for the sample 2002–2011, with the differences driven by the group of mothers working full-time or part-time. These changes are accompanied by an increase in use of formal child care.

The general set of individual control variables includes the mother’s age, education, partnership status, employment status, and individual labor income prior to giving birth. If a partner lives in the household, I included his personal characteristics and income. An eligibility indicator d_it allocated mother t into the treated group if she had a child in year t after 2007.

The main summary statistics of the variables are presented in Table 4 for the various pre-and postreform samples. The employment status and labor income variables are measured at the last employment spell prior to the birth. The income variables are adjusted to the 2005 base using regional consumer price indexes.

The samples observed shortly before and after reform implementation in 2006 and 2007 do not report any significant differences in females’ characteristics. The prereform mothers, who gave birth during two years prior to the reform, are less educated, are more likely to give a birth to the first child, and are more likely to be fully employed. These differences preserve for five-year time window around the reform. Table 4 shows two further important differences in the socioeconomic characteristics of females who gave birth in the period 2002–2011. The postreform mothers, on average, are less likely to be married, participate actively

in the labor market in full-time jobs, and have higher labor income. At the same time, the households do not report significant differences in household incomes. Other characteristics remain similar.

Following Laroque and Salanié (2014), the identification relies on the variation in financial incentives induced by the parental leave reform, the variation in the partner’s labor income, and the regional variation in access to a public childcare slot. The GSOEP provides information on the parental leave benefits received. First, an individual reports the average monthly amount of paid benefits; second, based on the observed socioeconomic characteristics of an individual and a household, the variable of the yearly paid maternal allowance is generated. According to the descriptive statistics for the estimation sample 2002–2011, the parental benefits significantly increased by, on average, 1,600 euros per year (almost 400 euros per month) after the implementation of the reform (see Table 4). Figure 4 shows the distribution of the reported benefits for the pre- and postreform periods. As expected, for all wage categories, the expected payment shifted to the right. In addition, there is a substantial variation in the introduced benefits for eligible mothers.

Figure 4

Descriptive statistics on childcare coverage show significant variation for the treated and control groups. These differences capture the variation in child care between states in the cross-section and over time discussed in Section 2.

Following Del Boca and Daniela (2007), I considered a household that derives utility from household net income Y_it, leisure time l_it , and child care CC_it . To avoid the problem of household bargaining, I assumed that in each time period, a woman optimally decides about her employment L_it and child care CC_it behavior, i.e., she maximizes the household utility conditioning on her partner’s behavior.

Steiner and Wrohlich (2004) showed the insignificance of the cross-elasticities among the partners.

The goods are assumed to be normal.

As a result of the utility maximization problem, we observe the following maternal outcomes:

The return-to-work decision is correlated with the decision about child care. On the one hand, a mother needs to substitute for her time in order to work. On the other hand, if she prefers to remain the main childcare provider, she does not return to her job. Therefore, I considered these decisions simultaneously. Summing up, at time t for a household i, the female choice set is represented by the following emp_it × cc_it combinations:

Notice that the net household income varies with the set of possible outcomes.

To evaluate the policy effect and to account for the potential correlation between employment and childcare decisions, I estimated the bivariate model. I used the existing variation in childcare provision at the state level to model the decision of formal childcare usage. Then, I exploited the quasi-random variation in financial benefits at the individual level to identify the effect of the reform on the employment decision given the mother’s childcare decision. The empirical specification of the model is as follows:

where P(emp_ijt) is the employment probability for the mother i at period t in the state j, d_i is a policy indicator for the postreform period starting in January 2007, and emplbef_ij is an employment status indicator for the mother i prior to her pregnancy. The variable P(cc_ijt) represents the probability of formal child care usage for the same mother. cccov_jt is the childcare enrollment ratio in region j in period t, ccinf_it is an indicator variable for the actual use of informal child care, and X_1ijt and X_2ijt are vectors of various individual and household sociodemographic characteristics.

The general set of individual control variables for the mother includes age, education, marital status, her partners’ characteristics, and household income. I assumed that characteristics such as public childcare availability, use of informal child care, number of children, child’s gender, and whether the child is a firstborn have a direct impact on the childcare decision, but not on the labor participation decision.

Notice that the subscript t : t = {1,2,3} refers to the years of parental leave after childbirth. For instance, t = 1 refers to the decisions made during the first year of child leave. Since I focus on the first transition into employment, the probability of being employed in the subsequent period is conditional on the previous nonparticipation decision.

The model (2) allows correlation between employment and childcare decisions through two channels. First, there is a direct effect of the childcare decision on the participation decision (as measured by the parameter a₄ from equation (1)). Second, the model allows correlation between individual-specific time-invariant effects, corr(u_1ijt, u_2ijt) ≠ 0. To test the significance of the childcare decision variable, I considered two specifications of equation (1) with and without cc_ijt. I estimated the system (1, 2) using the bivariate probit model.

The parameters of interests are as follows:

To evaluate the effect of the 2007 reform on mothers’ return to labor force, I used a quasi-experimental environment generated by the unanticipated changes in the parental leave system.

The treatment group consisted of the mothers who were entitled to the benefit after the reform implementation – i.e., women with children born on or after January 1, 2007.

I focused on mothers’ labor force participation decisions since that was one of the key goals of the reform (see Section (2)). In addition, the “father’s quota” did not increase the fathers’ involvement in child care and significantly changed fathers’ employment pattern (Kluve and Tamm. 2013)

The estimation of the causal effect of the reform has various issues. Since the treatment is universal, every mother is eligible for benefits. Therefore, we could not observe any control group outcome after the reform implementation. Thus, the empirical strategy consists of a before–after comparison of mothers from the control group, who gave birth shortly before a reform, and mothers from the treatment group, who gave birth shortly after the reform.

A similar identification strategy has been used widely in the literature. In this context, see Schönberg and Ludsteck (2014), Kluve and Tamm (2013), and Geyer et al. (2015).

The key identification assumption was that, without implementation of the reform, mothers in both groups would have behaved similarly in their employment decision after childbirth. This assumption required that the reform did not influence the fertility patterns in either groups. The empirical studies based on German Microcensus data present mixed evidence on the reform’s impact on the fertility patterns in the short and middle run. Cygan-Rehm (2016) found that the reform had a negative effect on the fertility decisions of low-income mothers through birth postponement. She also documented weak positive effects for other income groups. Raute (2019) pointed to a jump in fertility rates in August 2007. She also found an increase in fertility rates only for highly educated women over the five-year postreform period.

Kluve and Tamm (2013) showed that the reform was not anticipated by families. They presented a detailed analysis of the legislative process and news coverage, pointing out that the reform took place quite quickly. The government coalition agreed on the reform in May 2006, and the law was passed in the parliament four months later, in September 2006.

See, also, Kluve and Schmitz (2018).

Another potential threat to the validity of identification was the 2007–2009 financial crisis that could have had consequences for the employment and fertility behavior of the population. The empirical evidence suggests that the German economy, unlike the economies of other European countries, did not suffer long-term consequences of the crisis. On the contrary, Weber and Weber (2013) reported a decrease in unemployment rates during the period 2006– 2011. Raute (2019) found no shift in fertility behavior due to the economic crisis.

The parental leave reform coincided with the expansion of child care – a combination of policies that could have affected maternal employment behavior. By construction, however, the two reforms seem not to be systematically related.

See the discussion of childcare reform in Section 2.