Household Bargaining over Parental Leave and Labor Market Participation

Both parents have the chance to go on paid parental leave in many countries. This, however, involves temporary labor market absence for the parent on leave. The goal of this paper is to gain insight into the intra-household decision about parents ’ individual time allocation between childcare and labor market participation. We introduce a two-period household bargaining model regarding the child’s well-being- a product of the parents ’ time and money expenditure- as a household public good. It allows partners’ bargaining strengths to depend on their situation after a potential divorce. The main predictions of our model are then tested on German parental benefit data. As expected, our results show that women provide the lion’s share of childcare. However, the main contribution of this paper is to show that biological arguments do not suffice to explain the parental leave patterns found in the data. First, we show that a higher income of one partner decreases his or her individual childcare contribution and increases the amount of professional childcare hired. Second, we find that partners extend their parental leave periods in response to an increase in the other partner’s income. Based on our bargaining model we further argue that different custody expectations in case of a divorce are one important economical factor to explain the strong representation of women in childcare