Regulation Working Hours

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

The Economics of Imperfect Labor MarketsTito Boeri

October 2010

Tito Boeri and Jan van Ours (2008)The Economics of Imperfect Labor Markets

Princeton University Press

Chapter 5. Regulation of working hours

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Working Hours – What Are We Talking About

Regulation of working hours: What are we talkingabout?

May 1, 1886 day of strikes in the US for the introduction ofeight-hours working day“8 hours” productsMay 1→ Labor DayWorking hours per week decliningWorking weeks per year decliningPart-time labor

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Overlaps with other institutions

Collective bargaining and unions – tradeoffs wages & hoursFamily policies – balancing work and family lifeEmployment protection legislation – adjustment costs

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Measures

Intensive margin of labor supply – working hours (per week)Legal “restrictions”

Normal working weekMaximum number of overtime hoursOvertime premiumsSometimes specified over calendar time period

Bargained “normal” hoursShare of part-time work in total employment

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Working Hours – Measures and Cross Country Comparisons

Cross-country comparison

In many countries: normal working week is 40 hoursWide variation in maximum weekly overtime hours: 2 (Spain), 15(Netherlands)Also wide variation in maximum total working hoursOvertime premiums mostly 25-50%, sometimes 100%Normal weekly hours set by collective bargaining oftensubstantially lower than legal maximum

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Working Hours – Measures and Cross Country Comparisons

Cross-country information on working hours

Legal maxima on working hours Bargained PremiumNormal Overtime Maximum normal overtime

hours (% )Denmark 37 none 48 37 50France 39 9 48 39 25Germany 48 12 60 35-39 25Italy 48 12 60 36-40 10Netherlands 45 15 60 36-40Spain 40 2 47 38-40UK none none none 34-40US 40 none none 35-40 50

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Working Hours – Theory

Theory

Choice of number of hours on the basis of the hourly wage rateand preferences for leisure and incomeWorking hours per day, working days per week, workweeks peryear, working years over lifetimeChoice of working hours often restricted to a limited set, mostcommonly full-time, part-time and no-time

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Theory - regulating working hours

Shorter working hours→ less unemployment?Lump of labor fallacyIso-hours curve may shift: total hours of work is reduced with theintroduction of shorter working hours

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h1L1 = h2L2

L1

h1

h2

h

L2 L

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h1L1

h1

h2

h

h2L2

L2 L1 L

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Theory - regulating working hours II

If overtime hours pay a higher wage: iso-wage-cost curve nolonger equivalent to iso-hours curveKink in iso-wage-cost curveIf working time is reduced, workers often bargain an hourly wageincrease to keep the weekly wage constant

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h

L

A

B

CDF

E

h1

h2

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Theory - part-time work

If only full-time jobs are available, introduction of part-time jobsincreases labor supplyOutward shift of labor supply curve lowers wages and reducesfull-time employmentIntroduction of part-time jobs may also shift the labor demandcurve

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Budget line

hFT

UNP

UFT

C

A

E

Leisure (hours)

Labo

r inc

ome

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Budget line

hFT

UNP

UFT

C

A

E

Leisure (hours)

Labo

r inc

ome

UPT

B

hPT

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LS = FT

LS = FT+PTLD

L0 L1

w0

w1

PT

w

L

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LS = FT

LS = FT+PTLD1

L0 L1

w0

w1

w

L

PT

LD2

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Working Hours – Empirical evidence

Empirical evidence - hours of work

Substantial decline in hours of work between 1955 and 2005Substantial cross-country differences in annual working hours in2005: 1409 (Netherlands), 1790 (US)Anatomy of typical workweek:

Weekly hours: 31.8 (Netherlands), 38.8 (Spain)Workweeks per year: 38.4 (Netherlands), 42.2 (Spain)

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Working hours

Annual hours Average Anatomy 20021955 2005 annual Hours Weeks Hours

change per week per year per yearDenmark 2070 1552 -10.4 36.3 38.9 1410France 2040 1434 -12.1 36.2 40.5 1467Germany 2265 1437 -16.6 36.5 40.6 1480Italy 1958 1592 -7.3 37.4 41.0 1533Netherlands 2207 1409 -16.0 31.8 38.4 1223Spain 2041 1774 -5.3 38.8 42.2 1639UK 2156 1624 -10.6 38.2 40.5 1546US 2030 1790 -4.8

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Box 5.1 Mandatory reduction working hours in France

Francois Mitterrand (elected 1981) - 1982:Workweek 40 to 39 hoursWithout loss in workers’ payIntention to reduce to 35 hours in 1985 (not implemented becauseof economic situation)

Mandatory nominal (weekly) wage rigidity for current minimumwage workers: newly hired workers 2.5% cheaper (double wagestructure)Crepon and Kramarz (2002): use 39 hours April 1982 as controlgroup, 40 hours as treatment group

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Crepon and Kramarz (2002)

Probability to loose job (% ):1982-84 1985-87 Diff.

40 hours 16.5 11.9 4.639 hours 12.6 12.1 0.5Diff. 3.9 -0.2 4.1

So: 4.1% job loss on average due to reduction in working hoursFor low-wage workers for whom the reduction in hours wasassociated with monthly pay rigidity: 8.4% pointsQuite high as the reduction in working hours was only 2.5% (1hour from 40)

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Additional evidence France – Estevao and Sa (2008)

Lionel Jospin: 1998 workweek to 35 hours:February 2000: large firms (> 19 workers)January 2002: small firms (< 20 workers)

Government not stupid: also measures to reduce labor costs:Small firms: overtime premiums reducedSocial rebates were offeredMore flexible accounting of overtime work (annual in stead ofweekly)

Argument = reduction in labor costs & increase in productivity:no need to cut monthly wages

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Additional evidence France – Estevao and Sa (2008)

Treatment group: large firms (20-49 workers)Control group (up to 2002): small firmsStudy wage effects (hourly, monthly), employment (level, inflow,outflow), dual job holdings, job satisfactionWorking ≤ 35 hours (% )

Small firms Large firms Difference1998 26.3 25.9 -0.41999 27.1 27.6 0.52000 31.4 43.6 11.22001 34.3 52.1 17.82002 57.3 60.4 3.1

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Effects – dif-in-dif estimates

Difference in differences estimate:Usual hours Hourly wage (% ) Monthly wage (% )

Men Women Men Women Men Women1998 0.2 -1.0 0.9 -0.4 0.2 -0.41999 -0.6 -0.7 2.1 -1.7 0.6 0.22000 -0.6 -1.7 3.4 1.3 0.5 -0.42001 -1.2 -1.3 3.7 2.0 1.1 -0.82002 -0.9 -0.3 3.0 0.0 0.3 0.1

Furthermore:Hardly any effect on dual jobsMore turnoverNo employment effectsLess satisfaction about hours (except for high income women)

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Part-time jobs (% )

Part-time jobs (% )Part-time Involuntary PT PT prefer FT FT prefer PT

Men Women Men Women Men Women Men WomenDenmark 12.0 24.9 13.1 13.9 69 8 7 21France 5.3 23.3 52.9 38.8 69 35 11 25Germany 7.4 39.4 17.8 12.6 52 12 5 10Italy 5.3 29.2 83 42 22 32Netherlands 15.3 60.9 8.2 4.6 25 7 13 23Spain 4.2 22.2 36 37 8 14UK 10.0 39.3 23.8 9.5 72 22 3 9US 7.8 18.3 7.4 8.0

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How to appreciate part-time jobs?

Old discussion – see Sundstrøm (1991)

Negative view: trap leading to marginalization of womenPositive view: provide opportunity for continuous employment forthose women for whom fulltime work is not possible

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Changes in employment rate 1997-2007

-6 -4 -2 0 2 4 6 8 10 12 140

5

10

15

20

25

AU

BECA

DK

FIFRGE

ITNL

NZ

NO

PO

SP

SW SU

UK

Parttime

Tota

l

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Changes in employment rate 1997-2007

-6 -4 -2 0 2 4 6 8 10 12 140

5

10

15

20

25

AU

BECA

DK

FIFR

GE

ITNL

NZ

NO

PO

SP

SW SU

UK

Parttime

Tota

l

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Involuntary part-time work

10 15 20 25 30 35 40 45 50 550

5

10

15

20

25

30

35

AU

BE

CA

DK

FR

GE

IT

NL

NZ

NO

SP

SW

UK

Percentage PT

Per

cent

age

invo

lunt

ary

PT

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Involuntary part-time work

10 15 20 25 30 35 40 45 50 550

5

10

15

20

25

30

35

AU

BE

CA

DK

FR

GE

IT

NL

NZ

NO

SP

SW

UK

Percentage PT

Per

cent

age

invo

lunt

ary

PT

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Working Hours – Policy issues

Policy issue 1:Should governments regulate working hours?

Efficiency reasons:If employers have monopsony power – working time reduction (overa small range)→ increase in employmentNegative externalities without regulation – “rat race”

Employment is not a lump-of-labor that can be redistributed at nocostsDifficult to find strong arguments in favor of governmentintervention

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Working Hours – Policy issues

Policy issue 2:Should governments stimulate part-time labor?

Cross-country differences due to differences in institutionalarrangements and union resistanceGrowth of part-time jobs may stimulate full-time employment(Netherlands)Part-time jobs may facilitate combination of work and care

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Why Does Regulation of Working Hours Exist?

Why does regulation of working hours exist?

Hours of work is rarely the outcome of a market processMarket failures: conflicting preferences of workers and employers,institutional restrictionsUnions only represent interests of their workersGovernments may influence hours of work for social reasons(family life) or because they want to influence composition ofunemployment (early retirement schemes)

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Review Questions

Review Questions

1 Under what conditions does work sharing lead to an increase inemployment, and how plausible are these conditions?

2 Why do firms employ part-time workers instead of full-timeworkers?

3 How does overtime work affect the trade-off between hours andworkers?

4 Why do overtime premiums exist?5 What happens if the standard working week is reduced in a

situation where workers work overtime?

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Regulation Working Hours

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