Family-friendly policies often aim to make it ‘easier’ to have children, yet little is known about how firms respond to such policies. This column develops a structural model of the labour market and applies it to administrative data from Spain to show that while family-friendly policies that provide job security increase fertility by making motherhood more compatible with continued employment, they can also lead firms to hire and promote fewer women in anticipation of the potential associated costs. Promotion subsidies, in contrast, can increase both fertility and the average lifetime earnings of women.
Low fertility rates are a growing policy concern across many advanced economies. With fewer than two children per woman in nearly all OECD countries, concerns over shrinking workforces and the long-term sustainability of pension systems are mounting. In response, governments have rolled out a wide array of family-friendly policies – from generous parental leave to subsidised childcare and flexible work arrangements.
A growing body of research has examined how family policies affect female labour supply and fertility decisions (see Doepke et al. 2022 and Albanesi et al. 2023 for recent reviews). Much less is known about how firms respond to these policies – and how their reactions, in turn, shape women’s employment and fertility. Yet the behaviour of firms may be crucial to understanding policy effects. On one hand, such policies may increase labour costs and reduce the demand for mothers as employees (Olivetti and Petrongolo 2017). On the other hand, as men and women enter the labour market with increasingly similar human capital, the way women sort into occupations becomes a key driver of gender inequality (Goldin, 2014).
In a new paper (Bover et al. 2025), we develop a structural model of the labour market that integrates search and matching frictions, human capital accumulation, and endogenous fertility decisions. In the model, firms are active decision makers: they choose whom to hire, whether to promote workers from temporary to permanent contracts, and when to fire. Workers, particularly women, face a different but related set of choices: whether to work, how much to invest in their careers, and when to have children. Jobs differ in how fast women accumulate human capital. In non-flexible jobs, women accumulate human capital more slowly, especially when they have children.
The model captures a central feature of real-world labour markets: firms and workers are forward-looking and adjust their decisions based on anticipated costs and benefits. For example, if a firm expects that a promoted worker might reduce her hours or exit the labour force due to childbirth, it may hesitate to offer a permanent contract. Conversely, a woman who anticipates limited career prospects may opt to leave the labour force and have more children. These interdependencies create a nuanced set of trade-offs between fertility, employment, and earnings, which are central to our findings.
To evaluate these trade-offs quantitatively, we estimate the model using administrative data from Spain’s social security records, an ideal setting due to its combination of low fertility and a rigid labour market with limited turnover. Spain also offers a unique natural experiment, which we exploit to discipline model parameters. The 1999 Work and Family Reconciliation Act allows parents with a child up to age six to request part-time work (which we refer to as workweek reduction). The firms are obliged to grant such requests and cannot fire workers as long as they are on a workweek reduction.
We use the model to assess the impact of various alternative policy scenarios on labour market outcomes and fertility. We focus on three main categories of policies, as listed in Table 1: policies that affect labour market dualities, policies that provide flexible work arrangements, and policies that provide primary incentives to workers in firms.
Our main finding is sobering: many family-friendly policies produce a trade-off between fertility and earnings. Policies that increase fertility often do so by making motherhood more compatible with secure employment – but they also raise firms’ costs of hiring and promoting women, reducing women’s long-term earnings and labour force participation.
Table 1 Family-friendly policies
Firms matter: Evidence from Spain’s workweek reduction policy
The workweek reduction (WWR) policy was introduced to improve work-life balance, especially for working mothers. Women working under permanent contracts and in non-flexible jobs – typically those requiring long hours – were the primary beneficiaries. Take-up of WWR was concentrated among women with permanent contracts in non-flexible jobs. However, this benefit had an unintended cost: as firms could no longer dismiss workers in WWR, they became more reluctant to convert temporary contracts into permanent ones (Fernadez-Kranz and Rodriguez-Planas 2021). Using social security data, we show that after the reform, women’s promotion rates declined by 1.2 percentage points relative to men – a fact that our model reproduces as a target.
In the model, WWR also affects fertility. Because WWR makes jobs more secure and provides flexibility, it encourages more women – particularly those with permanent jobs – to have children. At the same time, firms’ increased selectivity means fewer women, especially those with lower productivity, are hired or promoted to a permanent contract. If we hold firm behaviour fixed – assuming they do not react to WWR – the policy would raise women’s welfare. But once firm responses are taken into account, WWR ends up reducing average female lifetime earnings and even lowers welfare for many women. Thus, the policy’s impact hinges crucially on how firms internalise its costs.
A consistent trade-off: More children, lower earnings
At the heart of the policy dilemma lies a structural trade-off: many family-friendly policies that raise fertility do so at the cost of reducing women’s long-term earnings. The mechanism behind this trade-off, as revealed by our model, hinges on job security and the incentives it creates for both firms and workers.
Secure employment – especially in the form of permanent contracts – provides women with a stronger foundation to have children. It reduces the risk of job loss and improves income stability during child-rearing years. But permanent contracts also impose future obligations on firms, particularly when paired with policies like workweek reduction (WWR) or extended leave. These obligations make firms more selective when deciding whom to promote or retain, especially when workers are young and their fertility timing is uncertain.
Our model shows that job security increases fertility because it makes motherhood more compatible with continued employment. However, this same security leads firms to hire and promote fewer women in anticipation of the potential costs associated with family-related leave or reduced working hours. As a result, fewer women climb the job ladder, and many remain in lower-paying, less secure roles. In turn, this weakens women’s incentives to invest in their careers early on, reducing their accumulation of human capital.
If women had perfect control over fertility timing, the trade-off would be less severe – firms could plan around potential leaves. But in the real world, fertility is partly unpredictable, and this uncertainty drives inefficient underinvestment by firms in female talent. Women who are willing and able to work long hours are often not promoted simply because firms cannot distinguish them ex ante from others who may reduce their labour supply after childbirth.
Ultimately, policies that enhance job security tend to encourage fertility but also lead to lower average earnings, as illustrated in Figure 1. How does the fertility–income trade-off affect women’s welfare? We find that both types of policies – those that increase fertility while lowering earnings and those that do the reverse – can raise welfare relative to the benchmark, as shown in Figure 2.
Figure 1 Policy trade-off
Note: This figure plots lifetime earnings (expressed as % of the value in the baseline economy) against completed fertility at age 44 for different policy scenarios. The dashed black line represents a fitted parabola that describes the only indifference curve passing through the three policies that maximize either lifetime earnings or completed fertility.
A better policy? Promotion subsidies
We find that promotion subsidies can increase both fertility and the average lifetime earnings of women. These subsidies effectively reduce the cost to firms of investing in women’s careers, mitigating the adverse selection problem induced by unpredictable fertility choices. In contrast to blanket policies such as extended leave or job protections, promotion subsidies are more targeted – they reward firms for recognising and advancing high-potential women, regardless of their family status. In our simulations, these subsidies yield the largest welfare gains, demonstrating that firm-directed incentives can outperform traditional family policies.
Figure 2 Welfare gains and loses
Note: This figure displays a model-based measure of welfare for women in relation to completed fertility at age 44 across various counterfactual policy scenarios. The black dashed line is a fitted polynomial. Model-based welfare is measured as the average value function.
Conclusion
Our analysis underscores a broader lesson for policymakers: labour market institutions and firm behaviour must be central in the design of family-friendly policies. The goal should not only be to help women balance work and family life, but also to create an environment in which firms can support such balance without incurring excessive costs. Ignoring this aspect risks reinforcing rather than reducing gender inequality. Future research and policy experiments should thus pay closer attention to the complex interplay between firms’ incentives, women’s employment prospects, and fertility decisions.
Family-friendly policies often aim to ‘make it easier to have children’. But if firms bear part of the cost, their response can undercut the intended benefits. Our findings suggest that policymakers should consider not only how policies affect workers, but also how they are perceived and internalised by firms. Ignoring firms’ incentives risks producing policies that backfire – raising fertility at the cost of widening gender gaps in employment and pay.
Source : VOXeu
