The arrival of children is one of the primary reasons for gender inequalities in the labour market. Anna Raute shares her findings on how firms can help alleviate gender gaps through family-friendly policies.
Motherhood causes women to take career interruptions for caregiving, negatively impacting their labour market outcomes—often known as the “child penalty”. While government policies, like parental leave and subsidised childcare, are in place across most OECD countries, they have only had limited success in improving mothers’ long-term labour force attachment and earnings.
Change is needed in the workplace, going beyond government policy. Working women and mothers value and show a willingness to pay for alternative work arrangements such as flexibility, working from home, and shorter workweeks. In ongoing research, my co-authors (Julián Costas-Fernández, Sebastian Findeisen and Uta Schönberg) and I use unique linked employer-employee data for Germany to examine how firms can play a key role in reducing gender inequalities through employer-provided childcare.
We draw on data from the Institute for Employment Research that combines survey data with social security data representative of the German economy. This yields a large sample that uses reliable employment data matched with more detailed survey data on benefits and the firms’ environment.
The policy landscape in Germany
Germany has a long history of government-provided paid leave, dating back to the 1950s. Since 1992, mothers have been entitled to up to 36 months of post-birth job protection and means-tested paid paternal leave benefits for a maximum of two years. A 2007 reform increased the generosity of parental leave benefits tied to pre-birth wages for up to 12 months, but maternal labour force participation has remained lower than in other Western European countries, partly due to the prevalence of more traditional gender norms in Germany.
Despite childcare being heavily subsidised, demand outstrips supply. Almost half the parents want a slot but only 33.5 per cent of under-three-year-olds are enrolled in childcare. This gap has led firms to recognise the value of offering family-friendly policies, particularly employer-provided childcare, to attract and retain workers.
Employer-provided childcare takes various forms: some firms reserve slots in existing childcare centres, others support small-scale parent-led initiatives, and larger firms establish their own childcare facilities near the workplace. These services often surpass public childcare in quality, offering extended hours and lower child-to-staff ratios. Many of these facilities also benefit from state and municipal co-funding, reducing the cost burden of the firms.
Impact on retention and employment
Firms providing childcare tend to be larger and more productive, and pay higher wages compared to firms not offering this in the same industry and local labour market. These firms have a more stable workforce, with a higher proportion of college graduates and employees of childbearing age (between 25 and 39). Mothers working at childcare-providing firms when they give birth are typically working in higher paying occupations and tend to be on a steeper career trajectory. This suggests that more advantaged women may have greater access to these workplace benefits, reinforcing inequalities across firms.
Employer-provided childcare has a significant impact on retention. Mothers in firms offering childcare are 10 per cent more likely to return to work compared to those without access to such benefits. This effect is particularly strong in the first three years post-birth, when alternate public provision is scarce. For high-wage mothers, in particular, the retention effect is more pronounced and long-lasting. Moreover, firm-provided childcare increases their labour force participation over time and, consequently, reduces the child penalty by over 10 per cent.
Skills shortages and market frictions
Firms are more likely to introduce family-friendly policies when they face staff shortages, particularly for skilled workers. In labour markets where replacement costs are high, offering these policies serves as a retention strategy. A firm experiencing staffing shortages is 10 percentage points more likely to introduce childcare.
Employer-provided childcare also influences workforce composition. Firms that introduce childcare policies see a six per cent increase in workforce size relative to non-providing firms, with most of this growth driven by women and mothers. Moreover, these firms attract more female talent, particularly in high-skilled occupations, and even experience an increase in the fertility of their incumbent female employees.
While employer-provided childcare comes at a cost, we argue that it provides a “double dividend” for firms. Firstly, it allows firms to compete for talent and attract female talent. It also enables growth. Secondly, it improves mothers’ retention and reduces career breaks, lowering replacement costs.
Supporting working women
As we mark International Women’s Day, our findings highlight the key role our workplaces play in ensuring gender equality. Firms that offer childcare not only retain more women but also attract female talent and foster a more inclusive workplace.
Investing in workplace childcare is a win-win. Firms can benefit from a more stable and productive workforce, while working mothers can maintain stronger career trajectories. As labour market demands evolve, companies that prioritise family-friendly policies will be best positioned to attract and retain top talent.
But the responsibility must be jointly shouldered by firms and public services. While employer-provided childcare positively impacts the careers of those mothers who have access to it, only broader government subsidised childcare will likely reach disadvantaged families and support their children’s development.
A labour market that fails to support working mothers ends up underutilising its full potential, impacting the economic growth, and exacerbating inequality. To truly close gender gaps in the workplace, policymakers and businesses must work together to expand access to childcare, ensuring that no mother has to choose between career advancement and caregiving.
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- Anna Raute shared her research at the event Women economists: shaping policies, shaping lives, hosted on Wednesday 19 February by the Centre for Economic Performance to mark International Women’s Day.
- This blog post represents the views of its author(s), not the position of LSE Business Review or the London School of Economics and Political Science.
- Featured image provided by Shutterstock.
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