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Implementing the 35 Hour Workweek by Means of Overtime Taxation

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Author Info
Victoria Osuna Padilla () (Universidad Pablo de Olavide)
José-Víctor Ríos-Rull () (Univ. of Pennsylvania, CEPR, CAERP & NBER)

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Abstract

In this paper we study the implications of taxing overtime work in order to reduce the workweek. To this purpose we study the roles played by team work, commuting costs and idiosyncratic output risk in determining the choice of the workweek. In order to obtain reliable estimates of the consequences of our policy experiment, we calibrate our model economy to the substitutability between overtime and employment using business cycle information. We find that a tax-rate of 12% of overtime wages implements the desired reduction of the workweek from 40 to 35 hours (12.5%). We also find that this tax change increases employment by 7% and reduces output and productivity by 10.2% and 4.2%, respectively. We also study a model economy with cross-sectional variations in the workweek that arise from plant-specific output risk and we find that in this model economy the tax-rates needed to achieve the same workweek reduction are significantly larger. Finally, we find that taxing overtime dampens business cycle fluctuations and that its welfare costs seem to be very large

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2002/04.

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Length: 43 pages
Date of creation: Mar 2002
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Handle: RePEc:cea:doctra:e2002_04

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Related research
Keywords: Workweek; Overtime; 35 Hours week; Labour Policy;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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    Other versions:
  2. Kydland, Finn E & Prescott, Edward C, 1991. "Hours and Employment Variation in Business Cycle Theory," Economic Theory, Springer, vol. 1(1), pages 63-81, January.
    Other versions:
  3. Andreas Hornstein & Edward C. Prescott, 1989. "The firm and the plant in general equilibrium theory," Staff Report 126, Federal Reserve Bank of Minneapolis. [Downloadable!]
  4. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January. [Downloadable!] (restricted)
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  6. Terry J. Fitzgerald, 1998. "Work Schedules, Wages and Employment in a General Equilibrium Model with Team Production," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 809-834, October. [Downloadable!] (restricted)
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  7. Card, David, 1990. "Labor supply with a minimum hours threshold," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 33(1), pages 137-168, January. [Downloadable!] (restricted)
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  8. Brunello, Giorgio, 1989. "The Employment Effects of Shorter Working Hours: An Application to Japanese Data," Economica, London School of Economics and Political Science, vol. 56(224), pages 473-86, November. [Downloadable!] (restricted)
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  11. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
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  14. Harald Uhlig, 1996. "A law of large numbers for large economies (*)," Economic Theory, Springer, vol. 8(1), pages 41-50.
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  16. Cho, Jang-Ok & Rogerson, Richard, 1988. "Family labor supply and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 233-245. [Downloadable!] (restricted)
  17. Marimon, Ramon & Zilibotti, Fabrizio, 2000. "Employment and distributional effects of restricting working time," European Economic Review, Elsevier, vol. 44(7), pages 1291-1326, June. [Downloadable!] (restricted)
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  18. Terry J. Fitzgerald, 1996. "Reducing working hours," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 13-22. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Antonio García Sánchez & María del Mar Vázquez Méndez, 2005. "The timing of work in a general equilibrium model with shiftwork," Investigaciones Economicas, Fundación SEPI, vol. 29(1), pages 149-179, January. [Downloadable!]
  2. Prescott, Edward & Shell, Karl, 2002. "Introduction to Sunspots and Lotteries," Working Papers 02-08, Cornell University, Center for Analytic Economics. [Downloadable!]
    Other versions:
  3. Edward C. Prescott & Richard Rogerson & Johanna Wallenius, 2009. "Lifetime Aggregate Labor Supply with Endogenous Workweek Length," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 23-36, January. [Downloadable!] (restricted)
    Other versions:
  4. Antonio Morales & Pablo Brañas Garza, 2003. "Computational Errors in Guessing Games1," Economic Working Papers at Centro de Estudios Andaluces E2003/11, Centro de Estudios Andaluces. [Downloadable!]
  5. Edward C. Prescott, 2003. "Non-convexities in quantitative general equilibrium studies of business cycles," Staff Report 312, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  6. Alexander Ueberfeldt, 2006. "Working Time over the 20th Century," Working Papers 06-18, Bank of Canada. [Downloadable!]
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