By Giorgia Conte
The Economic Challenge
Across high-income countries, fertility rates are falling and populations are ageing. Governments worry about shrinking workforces, pressure on pension systems, and the long-term sustainability of public finances. In response, policymakers strive to design effective tools to encourage families to have more children. Paid parental leave is often seen as one of the most promising options.
The U.S.: an extreme — but informative — setting
The United States provides a striking example. Fertility has fallen to around 1.6 births per woman — well below replacement level — yet the U.S. remains the only high-income country without a nationwide paid parental leave policy. At the same time, the lack of childcare subsidies and limited public support make raising children in the U.S. particularly costly. In this context, declining fertility may partly reflect insufficient institutional support for families.
A simple underlying logic
Raising children requires both money and time. For working parents, time is especially costly: every day spent at home looking after a newborn implies forgone earnings. By partially compensating parents for time away from work, paid parental leave reduces this opportunity cost. If having a child becomes less expensive, fertility should increase. But fertility is only part of the story.
A hidden trade-off?
In theory, one would expect that a policy like paid leave, which encourages parental time investment, would benefit children as well, since early time investment is crucial for children’s development. However, there is very little evidence on these policy effects, and some studies suggest that paid leave may be detrimental to children’s skill formation.
Importantly, no previous study has examined whether negative effects of paid leave on child outcomes arise indirectly through fertility responses. By encouraging higher fertility — especially higher-order births (second, third, or fourth children) — paid leave may lead parents to spread their resources more thinly across children. The result could be lower per-child investment, ultimately harming children’s skill formation. This is the mechanism I investigate.
Motivating evidence from New Jersey
In 2009, New Jersey introduced a paid family leave program providing six weeks of leave with partial wage replacement. Using a reduced-form empirical analysis, I find that the introduction of paid leave significantly increased women’s probability of giving birth. This empirical evidence motivates the next question: what are the broader consequences of this fertility response?
A model of fertility and child investment
To answer this, I build a dynamic life-cycle model in which in which families differ by income and education. Parents in the model jointly choose their fertility and how much time and money to invest in their children, and child human capital evolves over time as a result of these investments. I estimate the model parameters so that the model closely replicates key features of the U.S. economy — including the absence of widespread paid leave and fertility patterns across the income distribution. The model matches several moments it was not directly forced to fit, giving confidence that it captures meaningful behavioural responses.
Simulating a national policy
I then simulate the introduction of a paid parental leave policy similar to New Jersey’s at the national level and find that paid leave increases higher-order births by about 4.5 percent. The fertility response is strongest among middle-income and low-educated families. These households face tighter budget constraints and respond to having additional children by reducing per-child investment. Consequently, children’s human capital declines. In the model, this translates into up to 2 percent lower lifetime earnings for children in families with stronger fertility responses.
The quantity–quality trade-off
To isolate the mechanism, I run a counterfactual experiment: I simulate the same paid leave policy but prevent parents from adjusting fertility. In this scenario, paid leave increases parental time and slightly raises per-child investment and, in turn, children’s skills formations.
What this means for policy
Paid parental leave successfully reduces the cost of childbearing and increases fertility. But fertility and human capital are jointly determined within families. If higher fertility occurs primarily among families facing tighter resource constraints, the policy may reduce investment per child and child development.
Complementary policies — such as childcare support, targeted transfers, or early education investments — may be necessary to ensure that encouraging more births does not come at the expense of children’s long-run opportunities.
Broader implications (for Europe)
These findings are also relevant for Europe, where paid parental leave policies are already generous, yet fertility continues to decline — with almost half of households with children having only one child and only about one in eight having three or more children in recent years (European Commission, 2023). If fertility and per-child investment are jointly determined, expanding leave alone may not be sufficient to reverse demographic trends — and its effects may depend critically on how families adjust along both margins.
About the Author
Giorgia Conte received her PhD from Trinity College Dublin.
Her research interest are in family and labor economics. In her work, she combines dynamic structural macro models with empirical analysis applied to micro data to study questions at the intersection of labor markets, household decisions, and demographic change. Visit her website to learn more: https://www.giorgia-conte.com/
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