the Working Week: A Free Lunch or Irrational ideology?
The French government's decision to reduce the working week from 39 to 35 hours became law on 1 February 2000. Martine Aubry, France's employment minister, has stated that the objective of the policy is to reduce unemployment by sharing out the available work. The appeal of this proposal lies in its promise to reduce unemployment without affecting the Welfare State. Yet many economists have labelled the policy an 'irrational ideology' and have argued that imposing further restrictions on an already highly regulated labour market will result in even greater inefficiencies and may actually worsen France's unemployment problem.
Discussion Paper by Ramon Marimon and Fabrizio Zilibotti addresses the
questions of both the employment and the redistributional effects of a
policy that reduces working time. Much of the previous literature on
this subject has cautioned that government action to reduce the working
week may not result in the desired reduction in unemployment. The main
contribution of Marimon and Zilibotti's work is that it is able to trace
back the possible employment effects to basic parameters such as
workers' preferences for consumption and leisure, and the degree of
capital mobility. Hence, their model can be calibrated and solved
numerically to obtain a quantitative assessment of the effects of the
policy. It also provides a clear rationale as to why workers often lobby
for legislative restrictions on working time.
proponents of 'Restrictions on Working Hours' (RWH) argue that the
policy will induce employers to substitute some of the labour provided
by their current employees with new hirings. But opponents point out
that some of the firms' labour costs are fixed per employee (e.g.
screening, hiring, training, etc) and, as such, are independent of the
number of hours worked. Hence hiring more workers will increase the
costs of production, which in turn will reduce the incentives for firms
to generate employment.
the paper, the authors develop a general equilibrium model where
unemployment originates from search matching frictions; wages are set
endogenously via a standard Nash bargaining solution; and capital is
assumed to be fixed. The main forces stressed by advocates and opponents
of the policy are both present. First, in the tradition of the
search-matching literature, fixed costs are included in the form of a
vacancy creation cost associated with the hiring of new workers. The
existence of fixed costs means that the simple 'lump of labour' argument
does not apply. Second, the model assumes diminishing returns to labour,
and workers and hours are assumed to be perfect substitutes. This means
that the marginal product of labour increases and firms therefore have
an incentive to post new vacancies when the number of hours of labour
per employee falls. The presence of forces with opposite signs makes the
employment effects of the policy a priori ambiguous.
order to study the employment and welfare effects of RWH, the paper
first characterizes the equilibrium in a laissez-faire environment
(wages and hours are endogenous) and then constrains the maximum number
of hours worked (wages are endogenous). The initial result is that
workers and employers have largely differing (endogenous) preferences on
working time. In general, RWH benefits workers, both unemployed and
employed, but reduces profits and output. This is because restricting
working hours below the laissez-faire solution increases the workers'
bargaining power. Although the bargaining process under regulation gives
a socially inefficient outcome, the distributional gains for the workers
more than outweigh the efficiency loss.
employment effects of RWH crucially depend on the response of wages. If
hours were reduced but the total wage per employee remained constant,
employment would unambiguously fall. In the model, however, wages adjust
endogenously and the final effect on employment depends on the extent to
which the reduction in hours affects both the workers' marginal utility
of consumption and the marginal productivity of labour. The net
employment effect will therefore depend on both technology and the
workers' preferences for consumption and leisure.
a standard Cobb-Douglas production technology is maintained throughout,
the paper does offer results for different classes of preferences. The
benchmark utility function (GHH) is a generalized version of
quasi-linear utility, first introduced into the real business cycle
literature by Greenwood, Hercowitz and Huffman (1988). GHH preferences
have the property that the marginal rate of substitution between
consumption and leisure is independent of the consumption level within
the period. The second utility function used is one that exhibits a
Constant Elasticity of Substitution (CES) between consumption and
The assumption of a GHH utility function produces a number of interesting results. First, the relationship between working time and employment is non-monotonic. Specifically, starting from a laissez-faire equilibrium, there exists a range of reductions in working hours that will increase employment. Second, there exists a range of reductions in working hours that increase the welfare of all workers. Firms, however, lose since profits fall. Third, reducing working time below the laissez-faire equilibrium reduces employment when capital is perfectly mobile and there is no fixed factor of production. This finding suggests that at least part of the positive employment effects which may materialize in the short run are likely to vanish as firms adjust their productive capacity. It might also explain why some proponents of the policy would like it implemented on the widest possible area – e.g. the EU.
order to assess the quantitative importance of these results, the
authors construct calibrated economies and simulate the effects of
reductions in working time. Using conventional estimates of parameter
values and GHH preferences the paper presents results for three
different risk aversion parameters, ranging from risk neutrality (RRA=0)
to almost unit relative risk aversion (RRA=1). The above graphs plot the
unemployment rate, the welfare of the employed, the welfare of the
unemployed and the firms' profits as functions of the number of hours
worked for the case of RRA=0.8. The dashed line corresponds to the
laissez-faire equilibrium (i.e. 44 hours).
laissez-faire equilibrium in the calibrated model is confirmed by the
data: 44 hours is the average working week in the UK, the only European
country with virtually no restrictions on working time. While the length
of the working week that maximizes workers' utility is approximately 29
hours. The effect on employment varies with the level of risk aversion,
since this affects the wage response. However, for all three values of
risk aversion, moving from the laissez-faire to the utility maximizing
working week (i.e. from 44 to 29 hours) results in a fall in
unemployment, with the decrease in the unemployment rate ranging from
0.5 to 0.9 percentage points – the number of unemployed falling
between 6.25% and 11.25%. These small employment effects imply that the
total number of working hours in the economy is reduced by almost the
full amount of the reduction in hours per worker. Subsequently, GDP
falls by about a quarter.
the model to the current policy debate, the paper compares two regulated
economies with working weeks of 40 and 35 hours, respectively. As is
evident from the graph, the employment differences between these two
economies are small. These results do not significantly change if the
model is recalibrated with a higher structural unemployment rate. If
parameters were set so the unemployment rate in the 40 hours economy was
11% (about the average for continental Western Europe), then the
unemployment rate in the 35 hours economy would be 10.7%.
the analysis is extended to include CES preferences the results are even
less positive. Specifically, unless consumption and leisure are better
substitutes than in the Cobb-Douglas case, reductions of working time
cannot increase employment. The more complementary are consumption and
leisure, the more negative are the employment effects of restricting
working time. Yet even when these restrictions cause unemployment, the
welfare of the workers, both unemployed and employed, is still maximized
when a relatively large restriction on working time is imposed.
and Zilibotti's results are consistent with history: since the
industrial revolution workers have supported reductions in the working
week and employers have opposed them. Policies that reduce working hours
are nothing new, but there is an important difference in the current
reasoning for legislation: what was intended as a policy for alleviating
the conditions of the employed has now become a policy for alleviating
the conditions of the unemployed. Hence, there are very few examples of
policies that are motivated by this new rationale. One such example is
again that of France, which in 1981 decided to shorten the working week
from 40 to 39 hours. And it is this situation that Bruno Crépon and
Francis Kramarz study in their Discussion Paper.
few months after the election of François Mitterrand in May 1981, the
French government announced a mandatory reduction in the working week
from 40 to 39 hours and a 5% increase in the French minimum wage, the
SMIC. This was coupled with mandatory stability of monthly earnings for
minimum-wage workers – effectively a further increase in their hourly
wage – and a strong recommendation for the stability of monthly
earnings for those earning above this level. The law became effective on
1 February 1982.
order to evaluate the effects of the policy, Crépon and Kramarz compare
workers who, in March 1981, were identical in all but one respect: some
were working 40 hours a week (i.e. those directly affected by the
policy) whereas others were working between 36-39 hours (i.e. those
unaffected by the policy). This second group can be viewed as a control
group. The paper uses panel data from the French labour force survey.
The sample used contains individuals who were surveyed for the years
1981, 1982 and 1983, thus allowing the authors to follow the same
individuals and characterize their situation before, during and after
the implementation of the policy.
and Zilibotti's paper emphasized the importance of the response of wages
to the result of the policy. In 1981 minimum-wage earners were
guaranteed the same take-home pay as before the implementation of the
policy, but for other workers this was only a recommendation. However, a
survey carried out in 1982 shows that more than 90% of these workers had
their monthly pay unchanged after the introduction of the law. Marimon
and Zilibotti's work suggests that this scenario would lead to a fall in
employment. And this is confirmed by the results of Crépon and Kramarz.
found that for observationally identical workers, those affected by the
policy were twice as likely to lose their jobs compared with those
unaffected by the policy: 3.2% of workers employed 36-39 hours in March
1981 were unemployed in 1982, whereas 6.2% of workers employed 40 hours
in March 1981 were unemployed in 1982. As such, these results do not
constitute definitive evidence that the policy had an adverse impact.
They may stem from different unobservable characteristics of those
working 40 hours compared to those working 36-39 hours or from the
simultaneous increase in the SMIC. Hence the authors examined the
employment to unemployment transition before the announcement of the
policy, which was unexpected as Mitterrand's election is widely regarded
as being unforeseen. The results of this show that between 1979-81 those
working 40 hours appeared less likely to become unemployed than those
working 36-39. In addition, removing the relatively small proportion of
minimum wage workers had little effect on the results.
those working 40 hours the most severely affected were workers who were
also affected by the rise in the SMIC. For workers earning above the
SMIC, those most affected worked in the service sector, had long job
tenure and a low level of education. Hence, it seems that the
institutions that were designed to protect such workers have harmed them
disproportionately: it is the workers that have the greatest
difficulties in finding a job once unemployed (i.e. minimum wage
workers, the poorly educated and senior workers) that have been most
severely affected by the policy.
all firms were able to implement the working time restrictions
immediately. Hence, the authors extend their analysis by examining the
employment to unemployment probabilities of those workers who were still
working 40 hours after February 1982. Using a completely different data
set, they found that workers employed 40 hours in 1982, 1983 and 1984
were significantly more likely to lose their jobs that those employed 39
hours in the same years. This second analysis reinforces the authors'
initial result and they conclude that the reduction of the workweek from
40 to 39 hours is directly responsible for increased unemployment.
central message from both of the papers is that the response of wages is
crucial. Crépon and Kramarz show that if wages remain unchanged then
unemployment will rise. But France's current policy is slightly
different in structure from the 1982 version. As in 1982, minimum-wage
workers are guaranteed the same take-home pay, but this is now partly
subsidized by the government. Employers of non-minimum-wage workers will
be 'expected' to maintain the monthly earnings of their employees,
although no legal arrangements have been made to enforce this. However,
there are reasons to believe that employers may be less likey to comply
with this recommendation than they were in 1982 (when 90% of workers had
their pay unaltered): a number of firms have negotiated a commitment to
wage moderation, many having frozen wages for the next 18 months. Hence,
if wages are allowed to adjust then, according to Marimon and Zilibotti,
unemployment could initially fall.
is reducing the working week a free lunch or an irrational ideology? The
answer would seem to be neither. Marimon and Zilibotti's paper suggests
that there may be nothing irrational behind workers' support for working
time reductions. Their model suggests that even when restrictions on
working hours cause unemployment, the welfare of both unemployed and
employed workers is maximized when a relatively large restriction is
imposed. But the conditions for obtaining even small increases in
employment are rather restrictive. In particular, employment increases
can only occur if firms have some fixed factor of production: if capital
can freely adjust then reducing working hours unambiguously reduces
employment. In addition, the output loss associated with the policy will
have negative effects on both the tax base and government expenditure.
Therefore what little benefits there are may well be short-lived.
Discussion Paper No.
and Distributional Effects of Restricting Working Time' by Ramon Marimon
(European University Institute, Firenze, and CEPR) and Fabrizio
Zilibotti (Institute for International Economic Studies, Stockholm
University, and CEPR).
Discussion Paper No. 2358: 'Employed 40 Hours or Not-Employed 39: Lessons from the 1982 Mandatory Reduction of the Workweek' by Bruno Crépon (CREST-INSEE, Paris) and Francis Kramarz (CREST-INSEE, Paris, and CEPR).
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