Firm-level Effects of Reductions in Working Hours

Alessandro Tondini (FBK-IRVAPP)
Mara Lopes (UC3M)
Kentaro Asai (PSE)

Abstract

This paper explores how legislative reduction in working hours impact firms. We exploit the Portuguese transition to the 40-hour week in the 1990s, when Portugal gradually began to reduce the length of the standard working week by means of collective bargaining, and then suddenly decreased it to 40 at the national level. We show that firms that did not adjust voluntarily hours before the reform were experiencing higher labor demand in the pre-reform period, and then decreased both employment and output. We argue this is the result of increased labor cost, as nominal salaries did not adjust and hourly wages rose. The loss is output is partly offset by higher productivity, as firms are able to produce more for each unit of labour input.

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