Search frictions make worker turnover costly to firms. A three-month parental leave expansion in Sweden provides exogenous variation that we use to quantify firms' adjustment costs upon worker absence and exit. The reform increased women's leave duration and likelihood of separating from pre-birth employers. Firms with greater exposure to the reform hired additional workers and increased incumbent hours, incurring additional wage costs. These adjustment costs varied by firms' availability of internal and external substitutes. Economy-wide analyses show that a higher reform exposure is correlated with fewer hires and lower starting wages of young women compared to men and older women.

Search frictions make worker turnover costly to firms. A three-month parental leave expansion in Sweden provides exogenous variation that we use to quantify firms’ adjustment costs upon worker absence. The reform increased women’s leave duration and likelihood of separating from pre-birth employers. Firms with greater exposure to the reform hired additional workers and increased coworkers to make it coworkers’ hours, incurring wage costs corresponding to 10 full-time equivalent months in addition to replacing the workers. These adjustment costs varied by firms’ availability of internal substitutes. We also analyze a daddy-month reform and find similar employer responses to male workers’ leave, albeit smaller in magnitude. (JEL J16, J22, J32, J64, M52)