This paper analyzes the effects of changes in the parental leave benefits on post-birth labor market outcomes such as return-to-work, employment, and labor earnings. It is argued that the parental leave should be extended to help employees achieve balance of work and family life and to utilize women’s labor force. However, there is a tradeoff between the continuity of employment after childbearing and human capital depreciation to the time off the work.

This analysis takes advantage of policy changes in the Korean parental leave system. Under the Korean parental leave rules women can stay off work for 12 months and return to the same job at the same employer thereafter. Parental leave system was introduced by the amendment of the Act on Equal Employment in 1987. Working women with newborn baby less than one year old was entitled to take leave without cash allowance. From November 1, 2001, they received flat cash benefit of 200 thousand Korean Won (hereafter KRW), approximately 200 USD, per month during the parental leave. The amount has repeatedly increased to 300 thousand KRW after December 30, 2002, 400 thousand KRW after February 25, 2004, and 500 thousand KRW from April 27, 2007 to January 2011.

These policy changes create natural experiments that allow us to assess how changes in parental leave benefit affect working mothers with newborn baby. Future employment and earnings would be affected in two ways. First, the introduction and increase in cash benefit encourages working mothers to stay off longer and lowers employment and labor earnings in the short run. Second, extended absence from labor market would deteriorate human capital such as knowledge and skill in the long run.

The data for my analysis are drawn from Korea Labor and Income Panel Study (KLIPS). My empirical strategy uses the 2001 parental leave reform to identify the effect of parental leave benefit on return to work, short run and long run employment, and labor earnings of working mom after giving birth. This is essentially a regression discontinuity design (RDD).Using data from thirteen annual waves (1998 ~ 2010) of KLIPS, I identify the parent leave benefit effect by comparing treated mothers giving birth after November 2001 to control mothers giving birth before November 2001 using the thirteen waves of panel study. I trace the effects of parental leave benefit on employment and labor earnings in the short run and long run using the longitudinal data.

This research provides information on how introduction and changes of parental leave benefit affect subsequent working mothers’ labor market outcomes. The findings would be important for countries with fertility rate below the replacement level.