asymmetric information

The Signaling Role of Parental Leave

This paper provides empirical tests of signaling theory in the context of workers choosing to forgo paid parental leave to signal value to employers. Using administrative data from Denmark and an unanticipated increase in the maximum allowed duration of parental leave, I show how signaling contributes to a divergence in wages due to the information that workers' choices convey upon a leave extension. In contrast to human capital theory, an individual can take longer leave but gain in wages as long as their relative leave position in the population decreases. The results demonstrate unanticipated impacts of parental leave policies and highlight the importance of asymmetric information in the labor market.