A model-based analysis of the macroeconomic effects of a change in weekly working hours in Germany

This study uses model analysis to examine the macroeconomic effects of introducing a four-day work week with full pay in Germany. The simulations were carried out in calibrated dynamic equilibrium models that include important elements of the labor market model of Marimon and Zilibotti (2000) with search frictions in the labor market, collective bargaining by firms (employers) and households (employees) on wages and hours, declining marginal productivity of labor, and fixed costs of hiring. The study concludes that reductions in working time are associated with macroeconomic costs. In the baseline scenario, the long-run equilibrium following the nationwide introduction of the four-day workweek and the associated 8 percent reduction in average working time across all sectors of the economy is characterized by a loss in total output in the order of 4 to 5 percent of gross domestic product. On the one hand, the negative direct effects of the reduction in working hours for full-time employees are likely to be greater than the positive indirect effects that can be expected in connection with an increase in employment or weekly working hours. On the other hand, the costs arise because an increase in productivity that could fully offset the reduction in hours worked seems implausible.