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47 
the melbourne review
 
 Vol 4 Number 2 November 2008
the melbourne review
 A combination of policies — parental leave, loansand tax credits — is necessary to deal with possible conflicting market failures in relation to decisions
to take parental leave. This would allow for socialinsurance, provide parental leave that promotes child development and help to improve gender equality in the workplace.
1
 
F
ollowing widespread callsfrom unions and businessgroups for some form of paidparental leave, the ProductivityCommission is currently undertakingan inquiry into Paid Maternity,Paternity and Parental Leave.However, there are many delicateissues associated with paid parentalleave. Is it fair to fund leave where
The delicate balance on parental leave
 Joshua Gans
 
the melbourne review
Vol 4 Number 2 November 2008
48 
a loss in productivity. Thus someof the costs are felt by the parentmaking the leave decision whilesome are incurred by their employerand co-workers. Finally, there arecosts associated with caring for achild. However, to a large extent,it is the decision to have that childthat creates those costs and not theleave choice itself.technological options that reduce theneed for 24/7 maternal availabilitymaking the individual’s ability toengage in breast-feeding easier (or atleast no harder).Thus the goal of parental leave policyis to ensure that leave, or additional
leave, is taken where the benefits
outweigh the costs and not otherwise.However, because some of these
the benefits are primarily private?
Will paid parental leave improveworkplace outcomes for families? Andwhat policy responses might balance
the difficult trade-offs that arise?
What is the goal of parental leave policy?
The starting point for any analysis
of parental leave policy is to ask:
If economics were not an issue,what would we want our parentalopportunities and activities to looklike? My examination of publicdiscussions of parental leave suggeststhat parents would like to be able tomove between work and home lives
in a frictionless manner. Specifically,
following the birth of a child, one orboth parents would like to be ableto ‘pause’ their work life, take timeoff to spend with the baby (perhapsbetween 6 and 12 months) and thento ‘resume’ their work life where theyleft off prior to the birth.There are various impediments to africtionless movement between workand home life around the birth of a child. First, if the period of leaveis long enough, a parent’s humancapital may depreciate. Second, aparent’s attitudes towards theircareer may change when a child isborn and the parent may not wishto resume work at the same level of intensity as before. Third, parental‘pauses’ may be disruptive to theworkplace. Teams may be brokenup, skilled replacements may be
difficult to find and uncertainty may
be created.Thus the goal of parental leave policymay be to create a frictionless abilityand incentive for parentsto take a break from, and thenresume, their working life around thetime of childbirth but some costs orfrictions are inevitable. From
this perspective, the first best,or most economically efficientoutcome, will arise if the benefits
accrued from parental leaveoutweigh the costs.So what are the social costs thatarise when parents take leave?First, a parent gives up any jobsatisfaction for that period of time.Second, to the extent that there isdepreciation in human capital orworkplace disruptions, there is
What of the benefits? First, thereis the raft of benefits that parents
get from spending time with theirchildren. And, to the extent that
there are developmental benefits tothe child, the parents feel that benefit
too. Second, it may be that, like the
benefits of education, the benefits
associated with child developmentalso spill over to the rest of society.That is, there could be positiveexternalities that are not capturedby the parents.However, we must take care in
understanding these benefits. After
all, many of the child development
benefits can be achieved withoutspecific parental involvement.
Indeed, parental involvement ismost likely not necessary all of thetime. Non-parent child carers cando this job and, in some cases, maydo things better because they havemore experience and formal training.Even with breast-feeding there are
Thus the goal of parental leave policy is to ensure that
leave, or additional leave, is taken where the benefits outweigh the costs and not otherwise. However,because some of these elements are incurred orbestowed on agents other than the parents, there is a
 potential for a market failure.
 
49 
the melbourne review
 
 Vol 4 Number 2 November 2008
the melbourne review
elements are incurred or bestowed onagents other than the parents, thereis a potential for a market failure.
What are the possible market failures?
 A market failure arises when socialdecisions and private decisions donot match up. In the case of parentalleave, the private decision involveswhat parents choose to do given theirnegotiations with their employers.The decisions centre around who willtake leave, for how long and what thereturn to work conditions may be.
Clearly, many of the benefits
and costs associated with parentalleave are internalised in theprivate decision of the parents.For instance, they will internalisesome of the child-development
benefits and their own pleasure in
spending time with their children.In addition, they will internalise someof the costs felt by employers throughterms and conditions they accept forcontinuing employment.However, even in these cases,there may be some constraintson a parent’s ability to make theoptimal decision.•
Liquidity constraints:
a parentmay wish to take leave for thepurposes of enhancing childdevelopment but may not haveaccess to the income to supportindivisibilities associated with a job or career. Essentially, some jobs cannot easily be broken upinto smaller parts, whether it ison a day-by-day, week-by-weekor career-long basis. Careerindivisibility presents a problemthemselves during the time of leave. In theory, parental leaveis one activity that does not
have a significant impact on
lifetime income. In a world withperfect capital markets, parentscould borrow money to supportthemselves during the time theywish to take parental leave.However, for some households,particularly low-incomehouseholds, that liquidity maynot be available. Imperfectionsin capital markets caused byinformation asymmetry (namely,the commitment to earningincome post-child rearing) maymean that income support isunavailable. This is very similarto the income constraints that
make it difficult for students
to obtain loans to supportthemselves while obtaininghigher education.•
Indivisibilities:
parents maywish to share responsibilitiesfor parental leave but maybe constrained because of because it implies that workerswho are away from their jobsfor long periods or who cannotcommit to long work weeks maybe less productive than thosewho do. The key areas in whichproductivity can be affectedinclude working with teams, the
demands of a firm’s customers
(e.g. this is particularly relevantfor legal partnerships) and thepotential depreciation of training
and job-specific skills. Put
simply, it may not be possiblefor one or both parents to scaleback their jobs easily. Indeed,indivisibilities may exist withinthe home, making it costlyto outsource some child careactivities while maintainingparental involvement in others.This means that ‘market size ordemand’ effects can be importantand there may be gains fromone parent specialising in childrearing in the household.These factors may mean that parentstake a sub-optimal amount of leave
 In theory, parental leave is one activity that does
not have a significant impact on lifetime income. In
a world with perfect capital markets, parents could
borrow money to support themselves during the timethey wish to take parental leave. However, for some
households, particularly low-income households, that
liquidity may not be available.
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