Working Hour Reform, Labor Demand and Productivity

This paper examines the employment and productivity effects of the working hour reform in Portugal that reduced the standard hours from 44h to 40h in 1996-7. Using the variation across establishments in the intensity of treatment, I find that the establishments that were more treated experienced lower post-reform employment growth, although to a modest degree. Despite of the large reduction in the labor hour input, there is no statistically significant negative effect on sales, leading to a large improvement in labor efficiency measured by sales per hour. However, these overall effects mask substantial heterogeneity in responses: establishments in capital intensive sectors reduced employment without decline on sales, while those in labor intensive sector rather attempted to maintain employment, but their sales were negatively affected. These results provide indirect evidence consistent with the theories that highlight the role of scale effects and capital substitution effects.