Can nancial incentives reduce the baby gap? -Evidence from a reform in maternity leave bene ts∗

I study whether earnings dependent parental bene ts have a positive impact on fertility, and whether they are successful at narrowing the baby gap between high educated (high earning) and low educated (low earning) women. I exploit a reform in parental leave bene ts in Germany: Up until 2007 German parental bene ts were means-tested transfers and targeted at lower income families. From 2007 onwards parental leave benets were increasing in mother's pre-birth earnings with a minimum bene t being granted to all mothers. The reform increased the nancial incentives to have a child for higher educated and higher-earning women considerably, by up to 21,000 ¿. First I nd large discontinuous jumps in overall monthly birth rates nine months after the passing of the law as well as evidence for discrete drops in abortion rates for married women just after the law was passed. Second, I exploit the large di erential changes in parental leave bene ts across education and income groups to estimate the causal e ect of parental leave bene ts on fertility. I nd a positive, statistically signi cant e ect of an increase in bene ts on fertility, which is mainly driven by women in the middle and upper-end of the education and income distribution. My ndings suggest that earnings dependent parental bene ts, which compensate women for their opportunity cost of childbearing accordingly, might be a successful means to increase the fertility rate of high-skilled and higher-earning women and to reduce the disparity in fertility rates with respect to mothers' education and earnings.