A relatively large number of firms in Australia and in the US offer employer-funded parental leave to their employees beyond legal requirements. We present a theoretical labor search and matching model to explore why some firms offer paid parental leave to their employees. Firms choose the duration of paid parental leave offered to prospective employees. Matched firms and workers then negotiate wages through a Nash bargaining process. In equilibrium, the wage and the labour market tightness are determined by the point at which the wage equation and job creation condition intercept. We explore the reasons behind the presence of employer-funded parental leave and its effects on wages and unemployment. We also explore the labor market effects of imposing longer paid leave duration by law and reducing the costs of paid leave for firms.