Jacinda Ardern says increasing paid parental leave to 26 weeks could mean new parents are more likely to return to the same employer.
Cabinet today approved the policy to increase paid parental leave to 22 weeks by July 1, 2018, and 26 weeks by July 1, 2020.
Paid parental leave is currently at 18 weeks. The Government will meet the cost of increasing it and estimates it will have a net cost of $325m over four years.
Prime Minister Ardern said finding someone to replace staff for longer could prove tougher for some businesses, however it could also make it easier to find temporary replacements.
And workers could be more likely to return after a longer leave period, Ardern said.
"I hope by setting out the timeline that we have, [businesses] will be able to plan for that.
"I also hope that overall...they may perhaps be more likely to see their employee return to work because they have had a decent amount of paid parental leave."
In June last year the National-led Government used a financial veto to wipe a Labour Party bill by Sue Moroney to extend paid parental leave to 26 weeks.
Ardern indicated urgency would now be used, because Moroney's bill had already been examined by select committee. Labour has a tight timeframe to progress policies contained in its 100 day plan, with a deadline of February 2.
"It has essentially been through this process and more than once. It would not be a good use of Parliament's time to repeat that process to the same degree."
The "26 for Babies" group, made up of parent advocates, health advocates and parents, said its members were "over the moon".
Spokeswoman Rebecca Matthews said extending leave would give New Zealand children the best start in life.
"From nurses to Playcentre, from unions to Unicef, Government has always had clear advice that the right thing for our babies is time at home to bond with their families."
Council of Trade Unions Secretary Sam Huggard said it would mean parents and caregivers would "breathe a sigh of relief".
"The arrival of a new baby is a precious bonding time for a family, but it also can be very stressful. The evidence shows that giving baby and caregivers more time at home sets them all up for better outcomes when Mum and Dad return to paid work.
"Having new parents return to paid work when they are rested and feel ready is better for workplaces too."
During the election National promised to extend paid parental leave from 18 weeks to 22 weeks, to be fully implemented from 2019-20.