The think tank has warned fathers are being deterred from taking a greater caring role because of lost earnings to the family budget. Demos' survey of 1,500 employees found that only a tenth of men say they would use a longer period than two weeks of paternity leave.
In the UK only half of men take the two-week's leave they are entitled to, citing the fact that statutory paternity pay covers less than 25% of their salary.
Reinventing the Workplace, funded by the John Lewis Partnership, found under the new transferable leave, average-waged fathers who take six months leave stand to lose 88% (£13,000) of their earnings the year their child is born. This is added to the mother's lost earnings of £6,500.
Demos warns this not only prevents fathers from playing a prominent role at home, but can act as a barrier to getting mothers back into work following pregnancy.
A mother on an average wage who takes full maternity leave will be 72% worse off in the first year through lost earnings. This can be the equivalent of £16,336.
To combat this, Demos recommends a Carer's Account, functioning in a similar way to a pension, and paid into on an opt-out basis. The Carer's Account would be tax-free with contributions matched by the employer and could be transferred into the individual's pension if they do not have children.
Author Dan Leighton said: "Flexible working is the only option for Britain to address the social challenges of shared parenting and an ageing population that requires care. It will also be crucial to the success of the Government's Big Society agenda.
"As it stands, parental leave is expensive for the employee, the employer and the state. A Carer's Account would prepare parents and firms for children, allowing them to be better parents and better employees. More support for fathers also means more opportunities for mothers to return to work."
The survey also found women are more likely to request and to take up flexible working: 77% of employers said less than a quarter flexible working requests came from men. Women are also more likely to be successful in their requests: 81% of women had their request accepted compared with 77% of men.
The Demos polling also found that men are 50% less likely to use flexible working to spend time with the family. Men are more likely than women to use flexible working to have more free time.
The Demos research also found that 90% of employers offer at least one form of flexible working almost 60% of employees currently use flexible working and % of flexible working requests are approved
But 81%of employers do not expect to expand flexible working in the next two years and 92% of firms that do not currently offer flexible working are unlikely to start offering it in the next two years.
Half of firms with fewer than 50 employees grant less than one in four flexible working requests and almost two thirds of employees did not know their rights around flexible working
Kitty Ussher, director of Demos said: "It's common to think of small business as the most flexible but Demos' research shows that it's the largest companies leading the way. Yet those smaller companies that do embrace the concept of flexible working reap the rewards in terms of productivity and loyalty. It's time for the government to make it more in the interests of all companies - large and small - to be ahead of the curve by accrediting vanguard organisations. That will not only be good for families but also ensure that our economy becomes more adaptive and resilient."
And Charlie Mayfield, the chairman of the John Lewis Partnership said: "This report from Demos is timely. Greater flexibility will be integral to the workplace of the future. As our economies grow, businesses will need to be agile and responsive to new demands from consumers and employees. But flexible working needs to be a two way street between employers and their employees. It requires commitment but, in our view, it's worth the challenge in order to maintain competitiveness for the long term."
More than a fifth of employers surveyed admitted flexible working had been adopted during the recession to 'cut costs or avoid redundancies'. This was most common in manufacturing and pharmaceuticals (39%), public administration (31%) and education (30%).
Companies with fewer than 50 employees were the least likely to introduce flexible working than medium (50-249 employees) or large firms (250+ employees).
This was due to 'operational pressures', 'customer service requirements' and 'financial constraints'.
People working in banking, finance and insurance were the least likely to say their employer offers flexible working, citing that it was 'impractical given the nature of the job'.
Demos commissioned YouGov to carry out two large-scale surveys to explore the modern British workplace, asking questions to a weighted sample of over 500 (18-24 March 2011) employers and 1,500 employees (21-29 March 2011).
The number of economically active people is expected to reach 32.1 million in 2020, and increase of 6.7% since 2005.
