Can a Shorter Workweek Induce Higher Employment? Mandatory Reductions in the Workweek and Employment Subsidies
Posted: 19 Oct 2001
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Can a Shorter Workweek Induce Higher Employment? Mandatory Reductions in the Workweek and Employment Subsidies
Abstract
This paper presents a unified model of the impact on employment of a mandatory reduction in work hours in combination with an employment subsidy to reduce quasi-fixed costs of employment, while attempting to maintain worker's take-home pay or welfare level. Achieving the dual policy objectives of enhancing employment and maintaining worker income is not necessarily feasible. Nevertheless, a reduction in the legal workweek may induce a degree of downward wage flexibility, while an employment subsidy to firms accommodates downward wage rigidity. It may be possible, therefore, to increase employment with a policy that combines a reduction in the workweek with an employment subsidy. In general, however, the long run employment outcome is ambiguous, and a decline in output cannot be ruled out. More direct policy measures whose impact can be assessed with greater certainty - in particular, removing structural rigidities in the labor market - should be given priority to decrease long term unemployment.
Keywords: Workweek, overtime work, labor demand, labor supply, structural unemployment
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