Working Hours Policy Reform: Micro and Macro Impacts

We use microdata surveys to study the impact of the law approved in 2001 announcing a reduction of legal hours in 2005 in Chile. Using a difference-in-difference approach, we find non-significant and mild anticipated negative impacts on private employment, but mostly non-significant effects for directly affected workers at the implementation in 2005. Taking into account likely general equilibrium effects, we assess the macro effect of this policy change by constructing a synthetic panel and estimating local projections. We find a large increase in self-employment that offsets a drop in salaried private employment to generate a positive effect on total employment. These findings may shade some light on the current debate on reducing working hours in several countries. To rationalize our empirical results, we construct a search and matching model of the labor market in which both wages and hours are bargained. The maximum legal hours act as a side constraint in the bargaining game. Additionally, the model includes a flexible type of employment, self-employment, for which legal hours are not a constraint. We structurally estimate the model using data from Chile. Performing a counterfactual experiment in which the legal hours change, we find results similar to those implied by the local projection approach: namely, a small increase in total employment, a reduction in full-time employment, and an increase in self-employment. Furthermore, because changes in legal hours affect the outside option of workers (the equilibrium effect), the matching rate between workers and jobs is also affected, resulting in longer unemployment durations.