Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

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

Spencer Bastani (), Tomer Blumkin () and Luca Micheletto ()
Additional contact information
Spencer Bastani: Departmentof Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Tomer Blumkin: Department of Economics, Ben Gurion University, Israel
Luca Micheletto: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

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

JEL-codes: D82; H21; J31; J83

44 pages, May 20, 2016

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