The Impact of Overtime Limits on Firms and Workers: Evidence from Japan's Work Style Reform

How do limits on working hours affect firms, workers, and households? This paper answers this question by analyzing Japan's 2018Work Style Reform (WSR), which introduced the first binding cap on overtime hours. Using establishment payroll data and worker surveys in a difference-in-differences design, we show that the reform reduced monthly overtime by 5 hours (25%) and compressed the distribution of overtime within firms. Total earnings fell by 1.4% due to the effect of lower overtime pay. The reform also narrowed overtime gaps between standard and nonstandard jobs and reduced gender differences in long hours. Consistent with a reduction in the importance of extreme overtime as a screening device, women gained increased access to standard, career-track positions. We further document improvements in life and leisure satisfaction among female workers, but not among men. These gender differences are not explained by changes in perceived work intensification or time use. Instead, men partially substituted unpaid for paid overtime, consistent with the absence of well-being gains among male workers. Finally, exploiting information on spouses’ working hours, we find suggestive evidence of cross-spousal spillovers on women’s well-being, consistent with household-level complementarities.