Parental leave, worker substitutability, and firms' employment

Motherhood and parental leave are frequent causes of worker absences and employment interruptions, yet we know little about their effects on firms. Based on linked employer-employee data from Germany, we examine how more generous leave benefits affect firm-level employment and hiring decisions. Focusing on small- and medium-sized firms, we show that more generous benefits reduce firm-level employment in the short term, which is driven by firms with few internal substitutes for the absent mother. However, firms do not respond to longer expected absences by hiring fewer young women, even when few internal substitutes are available. To rationalise the findings, we show that replacement hiring occurs largely before the expected absence and that firms hire more external replacements when fewer internal substitutes are available. These findings indicate that extended leave does not harm firms when these can plan for the longer worker absences.