Direct and Cross Effects of Employment Protection: The Case of Parental Childcare

• DOI: http://doi.org/10.1111/sjoe.12193
• Date: 01 October 2017
• Published date: 01 October 2017

Direct and Cross Effects of Employment

Protection: The Case of Parental

Childcare∗

Martin Olsson†

Research Institute of Industrial Economics (IFN), SE-10215 Stockholm, Sweden

martin.olsson@ifn.se

Abstract

I examine whether employment protection affects the willingness of working parents to

provide childcare. Using a reform that made it easier for employers to dismiss workers in

small firms, I find that softer employment protection reduces the use of temporary parental

leave among directly treated fathers. In addition, I find that households respond to an increase

in the dismissal risk by reducing temporary parental leave for the indirectly treated spouse.

Spousal labor supply can thus serve as informal insurance against adverse income shocks.

Keywords: Employment legislation; family chores

JEL classification:D10; J13; K31

I. Introduction

The dual earner family is the most common family form in Organisation

for Economic Co-operation and Development (OECD) countries today.1

Consequently, many parents have to balance work and family life. Family

policies such as parental leave and subsidized childcare help parents to

juggle work and family, and these policies have been shown to affect

mothers’ labor supply and childbearing.2However, as shown by Del Boca

∗I wish to thank Anders Bj¨

orklund, Johan Egebark, Michael G¨

ahler, Andrea Ichino, Per

Johansson, Erik Lindqvist, Lars Persson, Per Johansson, Per Pettersson-Lidbom, Per

Skedinger, Peter Skogman Thoursie, Helena Svaleryd, and seminar participants at EALE

2011, SOLE 2012, ESPE 2013, IFAU, and Koc University. Financial support from the Jan

Wallander and Tom Hedelius Foundation and FAS (Dnr 2004-2005) is gratefully acknowl-

edged.

†Also affiliated with the Institute for Evaluation of Labour Market and Education Policy

(IFAU).

1The dual earner family is the most common family form in the majority of OECD countries

(OECD, 2010). In 2007, the median employment rate for partnered mothers aged 15–64 was

66.5 percent in OECD countries. For the US, the labor force participation rate for mothers

with children under the age of 18 was 71.3 percent in March 2010 (Sollis and Hall, 2011).

2Connelly (1992) finds that increased childcare costs lower the labor force participation

among married women with children. Skyt-Nielsen (2009) and Ekberg et al. (2013) find

©The editors of The Scandinavian Journal of Economics 2016.

Scand. J. of Economics 119(4), 1105–1128, 2017

DOI: 10.1111/sjoe.12193

(2002) and Del Boca et al. (2009), the rigidity of the labor market is

important for the success of such policies.

In this study, I examine the impact of employment protection on the will-

ingness of working parents to provide childcare. The level of employment

protection is directly linked to the risk of being dismissed for employee ab-

senteeism, and this is known to affect workers’ behavior regarding sickness

absence.3However, the effect of employment protection on other types of

worker behavior remains unclear.

To understand whether employment protection affects the willingness of

working parents to provide childcare, I analyze an exemption in a seniority

rule that, in January 2001, softened employment protection for firms in

Sweden with 2–10 employees. The reform was the outcome of an unex-

pected collaboration between the Green Party and the non-socialist parties,

and it meant that small firms could exempt two workers from the seniority

rule that states that the last person to be hired should be the first to be

dismissed at times of shortage of work. Because the exemption increases

the number of workers at risk of being dismissed in only small firms, it

creates within-country variation in employment protection.4This within-

country variation allows me to apply a difference-in-differences strategy to

compare the use of paid childcare during regular working hours between

workers in firms with 2–10 employees and workers in firms with 11–50

employees, before and after the reform in 2001.

For this purpose, I use total days of temporary parental leave as a

measure of paid childcare. An investigation of temporary parental leave

is interesting because it introduces a production loss, but no direct wage

cost, for employers.5In addition, temporary parental leave can be more

responsive to employment protection in comparison with sick leave, as

parents’ own health puts no restriction on the use of temporary parental

leave and it can be divided between two parents.

The results indicate that softer employment protection reduces working

fathers’ total days of temporary parental leave by 7.8 percent, on average.

that family policies can affect the within-household distribution of parental leave by intro-

ducing economic incentives or earmarking certain days for fathers. In addition, Lalive and

Zweim¨

uller (2009) provide evidence that job-protected parental leave has a positive effect

for mothers on fertility and on the time between giving birth and returning to work.

3See Riphahn and Thalmaier (2001), Ichino and Riphahn (2005), Lindbeck et al. (2006),

Olsson (2009), and Jacob (2013). See also Engellandt and Riphahn (2005) for how employee

effort might vary with employment protection regarding unpaid overtime.

4The reform of the seniority rule has been shown to decrease sickness absence (Lindbeck

et al., 2006; Olsson, 2009) and to increase hires and separations (Von Below and Thoursie,

2010) in small firms.

5In Sweden, parents are entitled to leave in order to care for a sick child younger than

12 years old during regular working hours. To compensate for the income loss during

temporary parental leave, the state provides an 80 percent compensation rate.

1106 Direct and cross effects of employment protection

©The editors of The Scandinavian Journal of Economics 2016.