We introduce parental leave policies in a labor search and matching model and study the effect of leave duration on unemployment and wages. We show that the effects are ambiguous and depend on whether the net benefit of the leave for the worker relative to her bargaining power is larger than the net benefit of the leave for the firm relative to its bargaining power. Our results suggest that simulated labor market outcomes in search and matching models may be sensitive to the calibration of these key parameters of the model

This work was supported by the Australian Research Council Discovery Project funding scheme [project number DP130103580]; the Institute of Fiscal Studies (Ministry of Finances, Spain); the Spanish Ministry of Economy and Competitiveness [grant ECO2016-76255-P]; the Autonomous Government of Catalonia [grants 2014SGR-1360 and 2014SGR-239, and XREPP — Research Reference Network for Economics and Public Policies-]; and the Autonomous Government of Valencia [grant AICO/2016/38]