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Department of Economics, Uppsala University Working Paper Series, Department of Economics, Uppsala University

No 2016:7:
Anti-discrimination Legislation and the Efficiency-Enhancing Role of Mandatory Parental Leave

Spencer Bastani (), Tomer Blumkin () and Luca Micheletto ()

Abstract: We study a setting where anti-discrimination legislation gives rise to adverse selection in the labor market. Firms rely on nonlinear compensation contracts to screen workers who differ in their family/career orientation. This results in a labor market equilibrium where career-oriented workers are offered an inefficiently low duration of parental leave. In addition, family-oriented workers are offered lower wages as compared to their equally skilled career-oriented counterparts. We demonstrate the usefulness of mandatory parental leave rules in mitigating the distortion in the labor market and derive conditions under which a Pareto improvement is possible. We also characterize the optimal parental leave policy and highlight the possibility for parental leave legislation to eliminate the wage penalty of family-oriented workers by supporting pooling employment contracts.

Keywords: anti-discrimination; adverse selection; parental leave; efficiency; (follow links to similar papers)

JEL-Codes: D82; H21; J31; J83; (follow links to similar papers)

44 pages, May 20, 2016

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