DP2127 Employment and Distributional Effects of Restricting Working Time

Author(s): Ramon Marimon, Fabrizio Zilibotti
Publication Date: April 1999
Keyword(s): Hours Reduction, Leisure, Search, Unemployment, Wage, Work Sharing, Working Time
JEL(s): E24, E25, J22, J23, J30, J41
Programme Areas: Labour Economics
Link to this Page: http://www.cepr.org/pubs/dps/DP2127

We study the emplyment and distributional effects of regulating (reducing) working time in a general equilibrium model with search-matching frictions. Job creation entails some fixed costs, but existing jobs are subject to diminishing returns. We characterize the equilibrium in the de-regulated economy where large firms and individual workers freely negotiate wages and hours. Then, we consider the effects of a legislation restricting the maximum working time, while we let wages respond endogenously. In general, this regulation benefits workers, both unemployed and employed (even if wages decrease), but reduces profits and and output. Employment effects are sensitive to the representation of preferences. In our benchmark, small reductions in working time, starting from the laissez-faire equilibrium solution, always increase employment, while larger reductions reduce employment. However, the employment gains from reducing working time are relatively small