Firm-Level Effects of Reductions in Working Hours

This paper examines how legislative reductions in working hours impact firms’ employment, output, and productivity. We exploit a Portuguese reform that reduced standard hours from 44 to 40 hours in 1996. Our findings indicate that the reform had adverse effects on the employment and output of affected firms. These effects can be attributed to a mechanical increase in hourly labor cost induced by the restriction imposed on firms to reduce monthly salaries along with hours. Treated firms adjusted their employment by reducing hiring. Furthermore, treated firms significantly improved hourly labor productivity, and there is some evidence suggesting an intensified use of capital. Firms that reduced working hours through collective agreements prior to the reform were able to increase productivity without adverse effects on employment and output. Together, these results show that working hour reductions can decrease employment for affected firms while simultaneously inducing a more efficient use of labor.