LAUSR

This study examines the effect of substantial changes in parental leave regulations on the non-cognitive development of children aged between 0 and 3 years. I exploit a large and unanticipated parental leave reform in Germany as a natural experiment. Since the first of January 2007, the replacement of a means-tested by an earnings-related system led to a gain in benefits for wealthier families whereas needier parents receive a lower overall benefit amount than before the reform. I detect a significant negative effect of this change in the parental leave system on the socio-emotional development of newborns and it turns out that children from loser-families drive this effect. The parental leave reform does not have a significant impact on 2–3-year-olds’ skills and development on average and the difference between children from losers and winners does also not persist in the longer run. I only find suggestive evidence that an increase in benefits improves some skills of 2–3-year-olds if compared to those who experience reductions in benefits.