Reducing Working Hours: A General Equilibrium Analysis

This paper examines the effects of restricting the weekly hours of workers in a heterogeneous-agent, general equilibrium framework. The framework presented here contains two types of workers, which allows the author to explore the consequences of a mismatch between the skills of the nonemployed and the skills of the employed. Previous studies of these issues have been based on partial equilibrium models. The main findings are that restricting weekly hours increases employment substantially, but may also lead to large declines in wages, productivity, output, and consumption, and can result in an increased wage disparity between skilled and unskilled workers. In one case, the policy raises the wages and consumption of skilled workers, while lowering them for the unskilled. A skills mismatch is shown to have dramatic effects on the aggregate and distributional consequences of the policy.