Parental Investments in Early Life and Child Outcomes: Evidence from Swedish Parental Leave Rules

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How do parental time and financial resources early in life affect the health and education of children? To address this question, we use the speed premium in the Swedish parental leave (PL) system, which generates variation in parental labor supply and income during the early years of their children’s lives. The speed premium grants mothers higher PL benefits for the subsequent child without the need to re-qualify for benefits by going back to work, provided that the spacing between the births of two consecutive children is below a pre-specified threshold. The richness of the administrative data used in our paper allows us to study the impacts of such policy on educational and health outcomes of both the existing and the new child since birth and up to early adulthood. We can also learn about changes in the labor supply of both the mother and the father in the years surrounding the birth of the new child, as well as changes in the household income, that allow us to understand the mechanisms behind possible impacts on children. We find that eligibility to higher PL benefit level decreases maternal labor supply around the time of the second birth. To compensate, there is an increase in paternal labor supply, which results in net positive effects on the disposable income of households. We estimate the effect of these additional resources on children and we find an increase in the 9th grade GPA and on the likelihood of college attendance of first-born children. There are no impacts on the second child. The mechanisms behind these results are a combination of a persistent positive income shock and a substitution from outside-the-home child care to maternal time. The effects are driven by boys and by children of high-income mothers. By affecting mainly children in high income families, such policy is a regressive one.