This paper studies the effects of policy changes induced by the German parental leave reform of 2007 on back-to-work and child rearing and behaviour. In particular, the reform was intended to decrease employment breaks related to the birth through the increased parental benefits and shortened paid leave period. To identify the behavioural response on the introduced incentives we estimate a bivariate choice model of mothers employment and child care decision. Using German Socio-Economic Panel Data for the period 2002-2010 the empirical results show that the policy has a significant negative effect on the employment breaks related to motherhood. The probability to come back-to-work during the first two years of child rearing decreases of 2.45 percentage points. The effect persists both for the first and second year of child rearing. The impact is amplified by 11 percentage points for mothers with regular part-time job. The results suggest that change in parental benefits has allowed mothers to compensate wage losses from the part-time employment and reallocate time in favour of child care. The impact of the reform on the child raring behaviour is insignificant. In the short run, the policy does not seem to produce significant effects on the child-rearing behaviour. We argue that mother remains a principal child-care provider due to the restricted availability of child-care institutions.
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