Mandated Benefits and Monopsony Power: Job‐Protected Parental Leave and the Gender Wage Gap

ABSTRACT

Standard theories of mandated benefits predict that policies such as parental leave affect wages mainly through employer costs. This paper shows that job‐protected parental leave can also change firms' wage‐setting power. In a monopsony framework, the labor supply facing a firm depends on the composition of worker separations. Job‐protected leave reduces childbirth‐related separations to non‐employment, which are relatively insensitive to wages compared with ordinary job quits. The remaining workforce becomes more responsive to wage differences across firms, raising labor‐supply elasticity and reducing monopsony power. Parental leave therefore has two opposing wage effects: a cost effect that lowers wages and a monopsony‐power effect that raises them. The paper derives conditions under which each force dominates for women and men and studies the implications for the gender wage gap. Identical leave reforms can generate different wage effects across labor markets with different degrees of monopsony power.