We study a setting where anti-discrimination legislation gives rise to inefficiencies in the labor market. Firms rely on nonlinear compensation contracts to
screen workers who differ in their family/career orientation. This results in a labor
market equilibrium where career-oriented workers are offered an inefficiently
low duration of parental leave and family-oriented workers suffer a wage penalty. We
demonstrate an efficiency-enhancing role of mandatory parental leave and derive conditions
for a Pareto improvement. We also characterize the optimal policy and highlight the possibility for parental leave to eliminate
the wage penalty of family-oriented workers by supporting pooling employment contracts.