Deutsches Institut für
Annette Bergemann • Regina T. Riphahn
Female labor supply and parental leave benefits -
The causal effect of paying higher transfers
for a shorter period of time
on Multidisciplinary Panel Data Research
Berlin, February 2009
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Gert G. Wagner (Social Sciences)
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Female labor supply and parental leave benefits -
The causal effect of paying higher transfers for a shorter period of time
VU University Amsterdam
Regina T. Riphahnb
Words without title page: 1947
We study the labor supply effects of a change in child-subsidy policy designed to both
increase fertility and shorten birth-related employment interruptions. The reform yields most
of the intended effects.
Key Words: female labor supply, fertility, child subsidy, parents money
JEL Code: J13, J21
a VU University Amsterdam, Department of Economics, De Boelelaan 1105, 1081 HV
Amsterdam, The Netherlands, firstname.lastname@example.org
b Corresponding Author: University of Erlangen-Nuremberg, Lange Gasse 20,
D-90403 Nürnberg, Germany, email@example.com
Acknowledgements: We are grateful for helpful comments by Gerard J. van den Berg and
During the past decades, female labor force participation has increased in most
OECD countries. However, it often still falls substantially short of the labor force participation
of men. Many countries have been considering policy reforms to address this issue. In 2007,
a German policy reform substantially modified family subsidies, with the dual objective to
increase fertility and to enhance incentives for women to return to the labor force after
Since January 1, 2007 parents of newborn children in Germany receive "parents'
money" (Elterngeld). It amounts to two thirds of the pre-birth net income of the parent who
interrupts employment. There is a minimum amount of 300 (also for those not previously in
the labor force) and a maximum of 1800 Euro per month. The benefit is paid at most for 12
months for one of the parents. The other parent can flexibly receive the benefit for two
months of employment interruption. The new transfer is more generous than the previous
means-tested program, which paid a maximum of 300 Euro for up to 24 months. However,
the new program pays for a much shorter period of time. The reform modified the parental
leave benefit and its entitlement period. At the same time the parental leave period, which
involves job protection for three years, remained unchanged.
Classic labor supply models predict that the reform enhances female labor force
participation. First, it abolishes a work disincentive, as the old regime had mandated that
every Euro earned was to be deducted from the transfer amount. Second, transfers can be
much higher now than before. At the end of the transfer period, a sizeable income drop now
gives a stronger incentive to substitute transfers by labor income. Third, the transfer payment
period was reduced by half, which suggests a faster return to the labor force than under the
In addition to the overall labor supply effect, particularities of the reform suggest
heterogeneous responses depending on prior labor earnings. Mothers with high prior
earnings are newly eligible to receive transfers. During the period of transfer receipt their
labor supply should now decline, and afterwards it should jump upward to (at most) the pre-
reform level. Low income mothers may now receive higher benefits than before, but for a
shorter period of time. When the transfer expires, their labor supply should be larger than
before the reform. Therefore we expect particularly mothers with low earnings to increase
their labor supply and to return to the labor force faster than before the reform.
Previous studies generally confirm the responsiveness of female labor supply to
extensions of family leave policies, but none seem to have investigated the causal effect of
cuts in duration. Baker and Milligan (2008) show that an extension of the Canadian maternal
leave period lengthens the time women spent at home. In previous studies for Germany,
Ondrich et al. (1996, 2003) find that mothers' probability to return to the labor force declines
when parental leave periods are extended. Han et al. (2007) detect clear behavior changes
following institutional reforms in the United States. Spiess and Wrohlich (2008) also discuss
the reform under study here and use a micro-simulation model for an ex ante analysis of its
expected labor supply impact. They predict an increase in female participation rates and in
the number of hours worked 12 months after a birth.
2. Data and Method
We use data from the German Socio-Economic Panel, an annual longitudinal
household survey. We consider all women who indicated a new birth in the surveys 2005-
2007, i.e. between January 1, 2005 and the end of 2007.1 We observe 451 births and drop
the first observed birth of 8 women who had two children in the considered period, thus
focusing on a mothers' last observed birth. Overall, we observe 395 births under the old and
48 births under the new regime.
Our dependent variables are indicators of women's intention to return to work and the
planned time until returning to work. Given the small number of observations and the
nonlinear nature of the response categories, we code a likely return to the labor force if a
woman indicates this to be the case (alternative answers: certainly no, rather not, probably
1 The SOEP data has been supplied by the Deutschen Institut für Wirtschaftsforschung (DIW
Berlin). For more information on the data see Wagner, Frick, Schupp (2007).
yes, certainly, already employed). In addition, we code a fast return to work, if she answers
that she plans to return within one year or faster (alternative answers: never, not within 5
years, within 2-5 years, immediately or within one year, already working). 88 percent of the
new mothers indicate that it is likely that they return to work and 41 percent indicate that they
will return within one year.
As the introduction of the reform was largely unanticipated, we are able to identify the
causal labor supply effect by comparing the labor force participation intentions for women
under the two different policy regimes. Figure 1 depicts the development of monthly births
between January 2005 and December 2007 and confirms the exogenous nature of the timing
of the reform. In addition to the reform effect, we also control for various sets of covariates,
notably, the age of the child at the time of the interview, whether it is a first child, and whether
the woman lives in East Germany, where child care facilities are substantially better than in
Table 1 presents descriptive statistics of our variables. The covariates of the two
subsamples of women who gave birth before and after Jan. 1, 2007 differ with respect to the
age of the child, whether or not the birth is a first child and the religious affiliation. The
sampling frame of the data causes the higher average age of children born prior to 2007,
because e.g. births in 2006 can be observed both in the surveys in 2006 and 2007 whereas
births in 2007 can (so far) only be measured if the 2007 interview took place after the birth.
Note that the main part of the interviews take place in February and March. We find a higher
fraction of first births in the 2007 sample than in the years before, as well as a lower share of
mothers with Christian religious affiliation in 2007 than in the years before. Since that the
aggregate figures (see Figure 1) do not suggest a substantial increase in fertility in 2007, we
have no reason to assume a causal connection between these two covariates and the
Table 2 presents Probit estimation results of the effect of the benefit reform ("birth in
2007") on the two indicators of female labor supply after child birth, i.e. whether the mother
plans to return to work ("likely return") and the expected time until the return ("fast return"). If
the 2007 reform increased the probability and speed of return we would expect a positive
average marginal effect of the "birth in 2007" variable in all regressions.
The estimations of the likely return yield an insignificant reform effect. Columns 1-3 in
Table 2 depict the average marginal effects for three specifications which are indicative of
specifications with additional control variables. Mothers of only one child and with high levels
of education have a higher expected probability to return to the labor force.
Columns 4-7 depict the results with respect to the expected timing of a return to the
labor force with various sets of control variables. Here we find the expected significant effect
of the reform on the timing of the return to the labor force. The marginal effect is substantial
at about 14 percentage points which compares to an average of 40 percent of all new
mothers who plan to return to the labor force fast.
We find a higher propensity to quickly return to the labor force among well educated
women and among those with a strong attachment to the labor force. Not presented are
marginal effects which suggest a substantially higher propensity of East German women, of
women without a religious affiliation, and of those with older children to return to the labor
force quickly. Additional specifications, which we do not present to save space, showed that
own income has a positive effect on a fast return to the labor force and partner income yields
an insignificant negative effect.
To test whether the effect of the reform differs depending on prior earnings we
additionally controlled for interaction effects of prior earnings with the "birth in 2007" indicator
for both dependent variables (not presented to save space). The interaction term generates
insignificantly negative interaction effects, indicating that the overall positive labor supply
response of the reform is predominantly driven by mothers with lower pre-birth earnings.2
This matches our expectations and points to the potential distributional impact of the reform.
This is the first study to evaluate the causal effect of a reform that increased parental
leave benefits' amounts and shortened their payment period. Based on planned labor force
participation the reform succeeded in speeding up mothers' return to work. This shortened
employment interruption should yield beneficial long term effects with respect to reduced
human capital depreciation and wage penalties suffered by mothers who used to drop out of
the labor force for extended periods after child birth.
2 The marginal effect of the interaction effect was computed using Stata's inteff command
(Norton et al. 2004). It was statistically significant at the 10 percent level in a linear probability
model with robust standard errors.
Table 1 Descriptive Statistics
Old regime New regime
(N = 395 births) (N = 48 births)
Mean Std.Dev. Mean Std.Dev.
Likely return (0/1) 0.891 0.016 0.792 0.059
Fast return (0/1) 0.400 0.025 0.458 0.073
Age of child at interview in
months 5.668 0.187 ** 1.875 0.194
Birth is first birth (0/1) 0.491 0.025 * 0.646 0.070
Single parent (0/1) 0.081 0.014 0.083 0.040
Maternal age at interview 30.597 0.292 29.646 0.727
Maternal schooling in years 12.634 0.137 13.135 0.405
Maternal experience in years 6.992 0.242 6.738 0.763
East German (0/1) 0.238 0.021 0.229 0.061
Foreign origin (0/1) 0.091 0.014 0.125 0.048
Religion Christian (0/1) 0.681 0.023 * 0.500 0.073
Religion other (0/1) 0.051 0.011 * 0.167 0.054
Religion none (0/1) 0.268 0.022 0.333 0.069
Note: ** and * indicate statistically significant difference of the subgroup means at the 1 and
5 percent levels.
Table 2 Probit Estimates - Dependent Variables: Likely Return and Fast Return
A.M.E. A.M.E. A.M.E. A.M.E. A.M.E. A.M.E. A.M.E.
(Std.Err.) (Std.Err.) (Std.Err.) (Std.Err.) (Std.Err.) (Std.Err.) (Std.Err.)
Birth 2007 -0.032 -0.044 -0.054 0.155 * 0.144 o 0.133 o 0.146 o
(0.052) (0.052) (0.053) (0.080) (0.079) (0.076) (0.077)
0.122 ** 0.075 *
0.144 ** 0.033 0.016
(0.031) (0.025) (0.050) (0.051) (0.050)
-0.112 -0.067 -0.07
(0.066) (0.056) (0.079) (0.079) (0.077)
0.040 ** 0.038 **
(0.007) (0.010) (0.010)
0.036 ** 0.033 **
(0.004) (0.007) (0.008)
Age of child y ** y ** y ** y ** y ** y ** y **
y** y** y
Pseudo R squared 0.055 0.16 0.213 0.010 0.062 0.11 0.136
Likely Return Fast Return
Note: A.M.E. stands for average marginal effect. All models consider an intercept term. **, *
and o indicate statistical significance at the 1, 5, and 10 percent level. All estimations are
based on 443 observations. We control for age of child using a second order polynomial. A
test rejected the addition of a cubic term.
Figure 1 Monthly Live Births (2005-2007)
Number of Live Birth
2005 2006 2007
Source: German Federal Statistical Office
Baker, Michael and Kevin Milligan, 2008, How does job-protected maternity leave affect
mothers' employment?, Journal of Labor Economics 26(4), 655-691.
Han, Wen-Jui, Christopher Ruhm, and Jane Waldfogel, 2007, Parental leave policies and
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Norton, Edward C., Hua Wang, and Chunrong Ai, 2004, Computing interaction effects and
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