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Implementing the 35 Hour Workweek by Means of Overtime Taxation

In this paper we study the implications of taxing overtime work in order to reduce the workweek. To this purpose we study the roles played by team work, commuting costs and idiosyncratic output risk in determining the choice of the workweek. In order to obtain reliable estimates of the consequences of our policy experiment, we calibrate our model economy to the substitutability between overtime and employment using business cycle information. We find that a tax-rate of 12% of overtime wages implements the desired reduction of the workweek from 40 to 35 hours (12.5%). We also find that this tax change increases employment by 7% and reduces output and productivity by 10.2% and 4.2%, respectively. We also study a model economy with cross-sectional variations in the workweek that arise from plant-specific output risk and we find that in this model economy the tax-rates needed to achieve the same workweek reduction are significantly larger. Finally, we find that taxing overtime dampens business cycle fluctuations and that its welfare costs seem to be very large

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Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2002/04.

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Length: 43 pages
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:cea:doctra:e2002_04
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  1. Andreas Hornstein & Edward C. Prescott, 1989. "The firm and the plant in general equilibrium theory," Staff Report 126, Federal Reserve Bank of Minneapolis.
  2. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  3. Hunt, Jennifer, 1996. "The Response of Wages and Actual Hours Worked to the Reduction of Standard Hours in Germany," CEPR Discussion Papers 1526, C.E.P.R. Discussion Papers.
  4. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
  5. Jennifer Hunt, 1996. "Has Work-Sharing Worked in Germany?," NBER Working Papers 5724, National Bureau of Economic Research, Inc.
  6. Marimon, Ramon & Zilibotti, Fabrizio, 2000. "Employment and distributional effects of restricting working time," European Economic Review, Elsevier, vol. 44(7), pages 1291-1326, June.
  7. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-73, April.
  8. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
  9. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  10. Terry J. Fitzgerald, 1996. "Reducing working hours," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 13-22.
  11. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
  12. Brunello, Giorgio, 1989. "The Employment Effects of Shorter Working Hours: An Application to Japanese Data," Economica, London School of Economics and Political Science, vol. 56(224), pages 473-86, November.
  13. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 319-354, April.
  14. Cho, Jang-Ok & Rogerson, Richard, 1988. "Family labor supply and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 233-245.
  15. Cho, Jang-Ok & Cooley, Thomas F., 1994. "Employment and hours over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 411-432, March.
  16. Terry J. Fitzgerald, 1998. "Reducing working hours: a general equilibrium analysis," Working Paper 9801, Federal Reserve Bank of Cleveland.
  17. Kydland, Finn E & Prescott, Edward C, 1991. "Hours and Employment Variation in Business Cycle Theory," Economic Theory, Springer, vol. 1(1), pages 63-81, January.
  18. Terry J. Fitzgerald, 1996. "Work schedules, wages, and employment in a general equilibrium model with team production," Working Paper 9613, Federal Reserve Bank of Cleveland.
  19. David Card, 1990. "Labor Supply with a Minimum Hours Threshold," Working Papers 642, Princeton University, Department of Economics, Industrial Relations Section..
  20. Harald Uhlig, 2010. "A Law of Large Numbers for Large Economies," Levine's Working Paper Archive 2070, David K. Levine.
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