Employment, Social Affairs & Inclusion

Outcomes of the 2006-2007 parental leave policy change in Germany

Evidence level:
 
Evidence of effectiveness:
? - 0 + ++
Transferability:
? - 0 + ++
Enduring impact:
? - 0 +

Practice overview

This study investigates how a 2007 change in parental leave policy in Germany has affected return- to-work and labour market outcomes of mothers of new-born children. In January 2007 the German parental leave benefit system changed from being means tested to earnings-tested. In practice this meant that before the reform families received a means tested transfer of 300 euro/month for a maximum of 24 months; after the reform this amount depended on the earnings of the parent prior to birth, and was paid of a maximum of 12 to 14 months. The study described here investigates the outcome of this change by comparing 993 families who fell under the new system because their child was born in the first quarter of 2007, with 851 families who did not fall under the new system because their child was born in the last quarter of 2006. All families were selected from of a random 1% sample of the population living in Germany (the German Microsensus). The two groups were compared on the employment status of the mothers in the first and second year after birth. An additional analysis estimated what the effect would have been if additional child care for very young children would have been available at low costs.

Practice category

  • Supporting Parenting and Assisting with Childcare

Recommendation pillars

  • Access to adequate resources
    • Provide for adequate living standards through a combination of benefits,
    • Support parents’ participation in the labour market,
  • Access to affordable quality services
    • Enhance family support and the quality of alternative care settings,
    • Improve education systems’ impact on equal opportunities

Age groups

  • Young Children (age 0 to 5)
  • Adults (age 20+)

Countries that have implemented practice

  • Germany

Target groups

  • Parents

Years in operation

The changes were implemented in 1990, 1996 and 2000.

Scope of practice

  • National level

Type of organisation implementing practice

  • National Government

Rationale of practice

In January 2007 the German parental leave benefit system changed from being means tested to earnings-tested. In practice this meant that before the reform families received a means tested transfer of 300 euro/month for a maximum of 24 months; after the reform this amount depended on the earnings of the parent prior to birth, and was paid of a maximum of 12 to 14 months. 

Mode of delivery

  • Bank transfer

Delivery dosage

  • Frequency:  Monthly
  • Duration: for 24 months

Location of practice

  • Institutionalised

Evidence of effectiveness

Labour market participation of mothers increased as a result of the changes in parental leave policy. Because the reform changed the economic incentive to re-enter the labour market after childbirth, this effect differed between mothers from households with a above median household income and those from a low household income. In the first year after the reform, more mothers from high income families withdrew from the labour market than before the reform. At the same time, in the second year after the reform, more mothers from low income families returned to the labour market compared to before the reform. These results are comparable to what previous studies have found that have investigated the effects of parental leave reform on labour market supply. Additional analysis showed that a large part of this increase in labour marker participation was in fact the result of a concurrent change in childcare policy, which led to a large increase in the availability of publicly subsidized childcare places for children under three years. 

Evaluation 1

Geyer, Johannes, Peter Haan, and Katharina Wrohlich. 2014. “The Effects of Family Policy on Mothers’ Labor Supply: Combining Evidence from a Structural Model and a Natural Experiment.” SSRN Electronic Journal, April. doi:10.2139/ssrn.2430133

The study investigated the effect of two different family policies introduced by the German government on the number of mothers returning to work after their child turned one year old. One of these policies was a change in the parental leave benefit system in January 2007 from being means tested to earnings-tested. In practice this meant that in 2006 before the reform all families with a below-median income received a transfer of 300euro/month for a maximum of 24 months; after the reform introduced January 2007 all families were eligible for this benefit, but the amount depended on the earnings of the parent on leave prior to birth, and was paid of a maximum of 12 to 14 months.  The other policy under investigation was an increase in the availability of subsidised childcare in 2013 following the introduction of a legal claim for subsidised childcare for all children after first birthday, unconditional on employment status or income of the parents.

The effect of these policies was investigated using three steps: first, an economic model was used to predict the outcomes of the change in parental leave benefits. The model was tested on data from 1779 mothers with a child under three years old between 2001-2006 who were part of the German Socio-Economic Panel (SOEP). Second, the predictions of this model where then compared with the observed changes in maternal employment following the introduction of the reform, using a random 1% sample of the population in Germany, consisting of 2,224 mothers who gave birth in the first quarter of 2007 (treatment group), and 2,172 mothers who gave birth in the fourth quarter of 2006 (control group). Lastly the validated model was used to predict the combined effects of the change in parental leave benefits and the expansion in childcare places on maternal employment.

The results from the economic model and the observed changes after the actual parental leave reform show similar results. Results from both show that regardless of income, in the first year after the birth the number of women that work decreases. In the second year after the reform there is an increase in the number of working mothers, specifically the number of low income mothers that work. As can be seen from table 1, the model shows that the increase in childcare places, combined with the parental leave reform, will have the strongest effect on maternal employment: together these reform lead to a 7% increase in maternal employment in the second year after childbirth, compared to a 2% increase following the parental leave reform alone. This is a substantive increase on the 38% employment rate of mothers with a child between one and two years old before the introduction of both reforms. These results are consistent with the changes in incentives to work: In the first year after giving birth, incentives to work decrease due to the new benefit scheme, which results in a large negative effect of the reform on employment. Incentives to work decrease more strongly for women who had high earnings prior to the birth, which explains why the effect of the reform on employment is strongest effect for mothers with high incomes and mothers living in West Germany. In the second year, however, incentives change only for those who were entitled to the old scheme, i.e. low income households. For this reason there are no significant changes in average employment of mothers in West Germany or mothers with income above the median in the second year after the reform. The increase in childcare places results in an increase of disposable income in all employment- and income groups, and affect families across the income distribution equally.

Table 1: Simulated effects of child care and parental leave reforms on mothers’ labour force participation rates (%) for mothers with children aged 13-24 months

  Parental leave benefit reform only Child care reform only Both reforms
Average 1.77 5.45 7.38
West 1.46 5.38 7.01
East 3.11 5.74 8.94
Below median income 2.64 5.50 8.40
Above median income 0.57 5.38 5.97

Transferability

This particular combination of a parental leave reform together with an expansion of childcare has not been introduced or evaluated in other countries.

Practice Materials

  • Practice materials are not available 

Cost information

  • Implementation cost information is not available

Enduring impact

Since this was a natural longitudinal experiment, the study does not meet the EPIC criteria for enduring impact, which requires at least a 2-year follow up with at least one significant result. The study has not had a follow-up study to re-assess the results nor is it known if any is planned.

Evaluation details

The study investigated changes maternal labour supply following two different family policies introduced by the German government. One of these policies was a change in the parental leave benefit system in January 2007 from being means tested to earnings-tested. In practice this meant that in 2006 before the reform all families with a below-median income received a transfer of 300euro/month for a maximum of 24 months; after the reform introduced January 2007 this amount depended on the earnings of the parent on leave prior to birth, and was paid of a maximum of 12 to 14 months. The other policy under investigation was an increase in the availability of subsidised childcare in 2013 following the introduction of a legal claim for subsidised childcare for all children after first birthday, unconditional on employment status or income of the parents. 

The effect of these policies was investigated by combining a structural model, which simulates the outcomes of the parental leave reform using data from the German Socio-Economic Panel Study (SOEP), and a natural experiment, which uses data from the German Microsensus to validate the results from the structural model. The validated model is then used to estimate the outcomes of the expansion in childcare places.

The structural model used data from the German Socio-Economic Panel (SOEP) between 2001 and 2006. The SOEP is a representative longitudinal micro database which holds a wide range of socio-economic information on private households in Germany. The SOEP data that were used consisted of 1779 mothers with a child under three years old at the time of the interview. The predictions of this structural model with regards maternal employment were compared with empirical data from a natural experiment which were contained in data from the 2007-2008 German Microsensus. The German Microsensus consists of a random 1% sample of the population in Germany; the 2007-2008 sample from the Microsensus consisted of 2224 observations on mothers who gave birth in the first quarter of 2007 (treatment group), and 2172 observations on mothers who gave birth in the fourth quarter of 2006 (control group). From both the treatment and the control group two subgroups were selected: one group of mothers with children 3-12 months old (993/ 851 in treatment and control group respectively), to analyse maternal employment in the first year after birth, and one with children 13-24 months old (1231/1321 treatment/control group respectively), to analyse maternal employment in the second year after birth. 

The outcomes related to the change in parental leave policy were initially investigated using a structural model. A structural model in general uses standard parameters derived from economic theory to simulate the result of a particular intervention. In this study, the structural model simulated employment behaviour before and after the changes in parental leave benefit for different employment levels: mothers who did not have a job, for those in marginal (0<30 hours) employment, those in part time employment (13-30 hours) and those in full time (>30 hours) of employment. Within each of those these employment categories changes in maternal employment as a consequence of changes in the parental benefits system were modelled by maximising the combination of household income and mother’s leisure time, where household income is a combination of gross wages, the tax and transfer system and childcare costs.  For each employment category, the outcomes of the structural model were then compared with the empirical data from the natural experiment on employment behaviour within the same employment categories, before and after the parental leave reform. In the analysis of both the structural model and the natural experiment the region of living (East vs West Germany) and the age of the child were used as covariates. Lastly, using the validated structural model, the joint effects of the parental leave reform and an increase in the number of childcare places was estimated.

The first results are the results from the structural model, in which employment behaviour before and after the changes in parental leave benefit for different employment levels was estimated, using household income, mother’s leisure time, region of living and age of child as predictors.  The structural model had several significant parameters, indicating household preferences which affect employment behaviour. The model showed that women with a child under twelve months old have a significant preference for leisure time (p< 0.001 for each two-month category up to 12 months, see table 1). This preference shows a steady decline as the children’s age goes up (up to 33-36 months). Additionally, this preference for leisure time is significantly lower in mothers in East Germany than mothers in West Germany (p<0.001, see table 1). The parameters for household income were significant both for net income and net income squared (both p<0.001, see table 1) suggesting that household income affects employment decisions, which is something that previous studies have also found. Taken together, this suggests that a mother’s decision to work is primarily based on household income, but for mothers with a child younger than 12 months, specifically those who live in West Germany, this decision is also influenced by the amount of spare time they have.

When this model was used to simulate the effect of the parental leave benefit reform, it showed a 2.2% reduced labour supply in the first year after giving birth as a reaction to the reform, with a larger effect for mothers from families with an above median income. However, in the second year after birth, the model indicates a 2% increase in labour supply, with a larger increase for mothers from families with a below-median income (3%) compared to mothers from families with an above median income (0.6%). In the second year there was a difference between mothers from West and East Germany (1.46 % vs 3.11% increase respectively) which are likely to reflect income differences and differences in the availability of childcare. Overall, these results are in line with expectations, as the reform resulted in an increase in household income during the first year for mothers with a higher income, with little change for families with a  below median income. In the second year however the reform did not affect families with a median income or above, as these families would not have received any benefits under the old scheme anyway; it did however increase financial incentives to work for the  below median income families (this incentive was negative under the old scheme). 

The second set of results come from the natural experiment, in which Microsensus data were used to analyse actual observed employment behaviour before and after the parental leave reform, using household income,  region of living and age of child as predictors. Results for the first year after birth show a decline in overall employment (full time and part time employment combined) after the reform, which is higher in East than in West Germany and declines more strongly in mothers with income above the median, compared to mothers with an income below the median. For part time employment there was a significant effect of income, with a (4%) decrease in part-time employment in mothers with income below the median. There were no changes in full time employment. In the second year after birth, there was a significant effect of household income, with a significant increase (6%) in overall employment in mothers with below-median income, and an effect of region of living, with a significant increase (7%) in part-time work in mothers in East Germany.  The results from the structural model and the natural experiment show similar results. Results from both show that in the first year after giving birth, labour supply declines for mothers of all socio-economic groups. In the second year the reform leads to an increase in employment rate, especially for low income mothers. 

Lastly, using household income and place of living as predictors, the structural model was used to estimate the joint effect of the parental leave reform and the expansion in childcare places on maternal employment, compared to the effect of each of those reforms by themselves. For this estimation only data from mothers with child older than a year were used, given that this is the age at which subsidised childcare would be offered. The results show that the expansion of childcare places has a clear positive effect (more than 5% increase) of on maternal labour supply. The expansion of childcare places thus has a stronger effect on mothers returning to work than the parental leave reform, with both reforms combined having the strongest effect (7.4 % average). 

These results are consistent with the changes in incentives to work: In the first year after giving birth, incentives to work decrease due to the new benefit scheme, which results in a large negative effect of the reform on employment. Incentives to work decrease more strongly for women who had high earnings prior to the birth, which explains why the effect of the reform on employment is strongest effect for mothers with high incomes and mothers living in West Germany. In the second year, however, incentives change only for those who were entitled to the old scheme, i.e. low income households. For this reason there are no significant changes in average employment of mothers in West Germany or mothers with income above the median in the second year after the parental leave benefit reform. The increase in childcare places increases the financial attractiveness of work since childcare slots are heavily subsidised, and thus are much cheaper than privately organized childcare. For this reason the increase in subsidised childcare slots results in an increase of disposable income in all employment- and income groups, and affect families across the income distribution equally.

Issues to consider

One of the assumptions that the study makes is that the working hours of the father remain constant. Although this limitation is mentioned in the paper, the legitimacy of this assumption is not tested, even though it is likely that a policy that affects family income will result in family wide decisions with regards to employment. 

The increase in female labour market participation following a change in parental leave policy is in line with the results from other studies that have investigated the effect of this particular 2006/2007 change in parental leave policy in Germany. This makes it likely that under similar circumstances, a similar policy change would have the same effect in other countries that share income and labour market characteristics with Germany. However, as the study also shows, a large part of the perceived effect of a change in parental leave policy was in fact due to a concurrent change in childcare policy: the change from a means-tested to an earnings-based parental leave benefit system increased maternal labour market participation, but the availability of affordable childcare was an important factor in this increase. The joint effect of the increase in subsidized childcare places and the parental leave benefit reform lead to more than three times higher labour market participation than under the parental leave reform alone. For this reason it is likely that the results will only transfer under conditions where childcare is available and affordable.

Indeed, the authors do not fully control for endogeneity also regarding births, which may be endogenous to policy and vice versa, and do not attempt to isolate the effects of a change in duration and benefits levels. Lastly, the authors do not consider long-time effects of the intervention; it may be that the added income effect of working for some women is miniscule (or even zero) but that an interruption of work in those two years will result in drastically lower cumulative life-time earnings. However, given the overall convincing design of the study and very close resemblance of the results to other similar studies, we do not consider these issues to have a substantial effect on the results.

Available resources

Not further resource available

Bibliography

  • Geyer, Johannes, Peter Haan, and Katharina Wrohlich. 2014. “The Effects of Family Policy on Mothers’ Labor Supply: Combining Evidence from a Structural Model and a Natural Experiment.” SSRN Electronic Journal, April. doi:10.2139/ssrn.2430133

Last updated

June 2019

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