This paper studies the implications of taxing overtime work to reduce the workweek. We study the roles played by team work, commuting costs and idiosyncratic output risk in determining the choice of the workweek. To obtain reliable estimates, we calibrate the model to the substitutability between overtime and employment using business cycle information. We find that a tax-rate of 12% of overtime wages reduces the workweek from 40 to 35 hours. This tax change increases employment by 7% and reduces output and productivity by 10.2% and 4.2%, respectively. Moreover, the welfare costs of this policy seem to be very large.
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We are grateful to the comments of the Editor of RED, as well as to those of two referees. We also thank attendants to the CEPR/CEMFI Conference “Inequalities, Labour Market Regulation and Redistribution,” the Rogerson–Wright Group of the 2000 NBER Summer Institute, the Penn Macro Lunch group, the UCLA Macro seminar, the members of the Macro Seminar and the Dissertations’ Committee of the Universidad Carlos III and, especially, Javier Díaz-Giménez. Ríos-Rull thanks the National Science Foundation for Grant SES–0079504, the Spanish Ministerio de Educación y Cultura for its “Programa Sectorial de Promoción General del Conocimiento,” the CAERP, and the University of Pennsylvania Research Foundation.
- 35 hour workweek
- Labor policy