This paper evaluates two approaches to work-sharing by examining both within the same macro model. The standard approach involves imposing a quantity constraint on labour market participants (a maximum number of standard hours for each worker). This approach is compared to a revenue-neutral employment subsidy financed by a tax on overtime hours ? an initiative intended to harness market incentives. The paper shows that the second approach brings much preferred results ? it involves lower unemployment, higher investment, and no reduction in the wage earnings of those already employed. The analysis suggests that policymakers should not reject work-sharing just because they are (justifiably) skeptical of mandated reductions in hours. The model involves the following features: (i) it is optimization-based (so there is a well-defined reason for labour market failure); (ii) it facilitates the investigation of trade-offs (so it can be determined whether improvements in unemployment must be accompanied by reductions in productivity, investment, average hours or wage rates); (iii) it involves a small open economy (so concerns about the limits to independent policy in this setting are respected); and (iv) it can be readily calibrated (so empirically relevant quantitative results are derived).
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 386.
Length: Date of creation: 2000 Date of revision: Handle: RePEc:ces:ceswps:_386
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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 E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
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