Labor Economics...Labor Economics The Workweek Reduction. Pierre Cahuc/S´ebastien Roux ENSAE-Cours...

Labor EconomicsThe Workweek Reduction.

Pierre Cahuc/Sebastien Roux

ENSAE-Cours MTPE

December 19th 2007

Pierre Cahuc/Sebastien Roux (ENSAE) Labor Economics December 19th 2007 1 / 27

Introduction

Introduction

Is Working time sharing a solution to unemployment ?

Basic idea : There is rationing on the Labor Market. A way toorganize this rationing could be to share working time to give some tounemployed.

Basic question : Is this way to proceed efficient ?

What parameters are to be considered ?

Productivity (organizational changes may affect firm’s labor demand)Wages

In France, workweek reduction from 39 hours to 35 hours.

Examined in Crepon, Leclair and Roux (2004)


Introduction

Outline

1 Some stylized and historical facts

2 Comparing 35-hours firms to others

3 Endogenous selection biases

4 Conclusion


Stylized Facts

Between Countries differentials in worked hours


Stylized Facts

Long term evolution of hours per workers


Stylized Facts

What about work sharing in other countries ?

Two countries have implemented work sharing policies : France andGermany.Germany : Since the WWII, important decreases in the number of weeklyworked hours.

70ies : 40 hours and 6 weeks of paid vacancies. To improve lifeconditions.

84 : 38.5 hours in Metallurgy and Printing. To share work. Diffusionto other industries. Integral compensation of wages.

1995 : IG Metall, 35 hours. Trade-off between flexibility and wages.Not very much applied


Stylized Facts

France :

During the 70ies, convergence towards 40 weekly worked hours and 4weeks of paid vacancies

Work Sharing was an issue of the 1981 presidential campaign.Objective to reduce to 35 hours. In a first stage, bargaining betweenemployees and employers unions : failure. Law of 1982 : workweekduration diminished to 39 hours with full wage compensation (nodecrease of monthly wages).It did not stop the rise in unemployment (see Crepon and Kramarz,2002)

1995, Robien law : incentives to reduce the workweek duration.

1997-8 : Aubry I law and II : the legal workweek duration decreases to35 hours. Firms negotiate flexibility vs workweek reduction. Fullcompensation but many helps.

During the same period, strong subsidies to part-time jobs (cuts inpayroll taxes). A kind of work sharing policy.


Stylized Facts

A rapid description of the legal devices

Firms had the choice to diminish their workweek duration using differentlegal devices :

1 Aubry I subsidized : were signed until 01/01/2000

Effective decrease of the work week duration of at least 10%.Important fixed subsidiesCommitment to create at least 6% jobs.

2 Aubry II forerunner : signed until 01/01/2000

Decrease of the workweek duration with possible redefinition of theworking time. Around 6% of true decrease. Not directly observable.No subsidy before 2000.Require signature of at least one representative union.


Stylized Facts

3 Aubry II : signed from the 01/01/2000

Decrease of weekly working time (with redefinition of hours), by 6%(apparently 10% in the collected data).Structural subsidies, (in the form of a progressive diminution of payrolltaxes until 1.8*Minimum Wage + 4000 F) for all firm who havereduced their working time.Signature of a trade union

4 39 hours :

Firms who do not have diminished their weekly working timeHave to increase their workers’ wages because hours in excess of 35hours have to be overpaid.

Remarks :

Applied only to firms greater than 20 employees

Limited amount of overtime hours

Strong increase of the minimum, dependent on the blue-collar workerhourly wage rate.


Stylized Facts

Evolution of the different devices with time

Firms are weighted by their number of employees.Pierre Cahuc/Sebastien Roux (ENSAE) Labor Economics December 19th 2007 10 / 27

Between-Firm comparisons

Data

Important variables to consider : Employment, Wages, Productivity.We also need to know when, how and if firms have reduced their workweektime.Sources :

Administrative data on firms who have signed a Reducing WorkingTime (RWT) agreement (DARES).

Fiscal data with firms’ accounts (BRN) : added value, capital andemployment.

DADS : Firm-specific skill, age and gender composition of the workforce in 1997.

The SIREN identifier allows the merging of these sources.

A big problem : data measure the diminution of hours but do not accountfor their possible redefinition. They cannot be used directly ! ! !



Methodology

Consider a production function with two factors, capital K and labor L.L = HN where N is the number of employees and H their working time.Working time can affect production in two ways :

On the use of capital : d (H) rate of capital utilization as a functionof the working time of the employees.

On the hourly efficiency of the workers : e (H) efficiency of theworkers. If H is too low, e (.) is increasing (set-up effects), if H is toohigh, e (.) is decreasing, because of fatigue effects.

Y = F (d (H) K , e (H) NH)

To estimate this function, we adopt a Cobb-Douglas specification withconstant returns to scale

Y = AK (1−β)NβHg

where g is the production elasticity to working time. It mixes d() and e().



In differences, the equation becomes

∆TFP = ∆ lnY − β lnN − (1− β) lnK = ∆ lnA− g∆ lnH

−g∆ lnH is the effect of RWT on the Total Factor Productivity (TFP),being assimilated to an individual productivity (and not an hourlyproductivity).Different measures of β are possible. Here, use of the property that β can be

estimated by the average share of labour costs in all costs by sector and firm’s

size. Results are robust to this definition.

Since ∆ lnH cannot be observed (because of redefinition problem), wedirectly use the information on the legal devices used by the firms. Hence

∆TFP = Xγ + gAI1AubryI + gAIIp1AubryIIp + gAII1AubryII + ε

X are control variables estimated at the beginning of the period, gAI is theeffect on the TFP of having reduced its working with an Aubry Iagreement, gAI = g∆ lnHAubryI



TFP evolution and WTR



Mean Evolution of some economic variables

Average growth rate between 1997 and 2000 of some economic variablesdifferentiated with respect to their WRT status.

39 hours Aubry II Aubry II Aubry I subsidizedforerunners

Employment 7,8 7,1 0,5 21,1Added Value 19,8 16,9 12,8 26,3Productive Capital (K) 29,5 28,1 29,3 48,7Labor Productivity (AV/L) 13,5 10,8 22,4 6,0Capitalistic Intensity (K/L) 26,3 23,9 48,7 29,8TFP 9,1 6,8 10,3 2,8Wage 8,9 8,2 11,4 7,6Labor cost 10,0 8,2 10,3 5,1Unit cost (cL/AV) 1,2 2,8 -1,1 2,6Observations 22991 8032 1972 10206



Relative evolutions of firms having reduced their workweekw.r.t firms that have not

OLS estimation.Aubry II Aubry II Aubry I subsidized

forerunnersEmployment 9,91 (0,33) 3,78 (0,67) 4,89 (0,37)TFP -3,68 (0,31) -1,79 (0,62) -0,67 (0,34)Productive Assets 4,20 (0,42) 0,40 (0,86) 2,55 (0,47)Added value 5,02 (0,39) 1,28 (0,80) 3,76 (0,44)Capital Intensity (K/L) -5,71 (0,44) -3,38 (0,89) -2,34 (0,49)Weekly Wage -2,54 (0,23) -2,45 (0,46) -1,49 (0,25)Weekly labor cost -5,97 (0,23) -4,26 (0,46) -1,98 (0,25)(Wage) Unit production cost -1,08 (0,24) -1,77 (0,48) -0,84 (0,26)Difference between TFP -2,29 (0,25) -2,47 (0,50) -1,31 (0,27)and Wage cost

Reference group : firms being 39-hours in the end of 2000.Control Variables : size, industry, firm-specific share of employees withrespect to skill and age, share of the wage cost in the added value of 1997.


Endogeneity Issues

Different possible biases

Results above obtained with econometric methods that control onlyfor observable characteristics. Can we confirm the results usingcomplementary methods ?

Three supplementary biases that cannot be controlled by observablecharacteristics

Unobserved heterogeneity bias : the evolution of the economic variablesand the choice of reducing the labor workweek are both related tounobserved characteristics.Treatment effect heterogeneity bias : the effect of the treatment maydiffer between firms (and may also explain the choice of some to betreated). In this case, no possibility to infer the effect of the RWT,should all firms be treated.Indirect effect. Macroeconomic effect of RWT (minimum wage) mayaffect the control group.

Consider the TFP : It is a technological parameter, can be interpretedas the consequence of the choice of RWT.


Endogeneity Issues

Representation of the different biases

Naive

ETT

ETNT

1997 2000

1

2

3

4

Variable ofinterest


Endogeneity Issues

The case of TFP

To control for unobservable, need for instruments.

Simplification of the problem : only the choice of Aubry I isconsidered, versus staying 39 hours.

Instruments should explain the choice without theoretically affectingthe interest variable.

A good candidate : the level of subsidies offered to firms reducingtheir working time.

It should clearly affect the choice of reducing the working time.It has no reason to directly affect firm’s TFP, since TFP is atechnological variable.

Plus it can be estimated ex ante for all firms

Two other instruments :

Share of firms in the same industry(N114) having signed a RWTagreement.Debt ratio of firms being greater than 50%.


Endogeneity Issues

Relevancy of instruments

Coefficients of the probit model explaining the firm staying 39-hours(instead of signing an Aubry I RWT agreement)

Instrument Coefficient Standard error SignificativityRatio Debt/Productive Assets>50% -0.04 0.02 0.03Aubry II potential subsidies -0.35 0.03 <0.0001Share of firms in the same industry -4.25 0.46 <0.0001having signed an Aubry I agreement


Endogeneity Issues

Econometric Formalisation

T is the treatment variable.

T = 0 ⇔ T ∗ = Zγ + v ≤ C39

If T = 1, ∆Y1 = a1 + Xb1 + u1 (1) If T = 0, ∆Y0 = a0 + Xb0 + u0

(0)

Let σ2k = V (uk), ρk = corr (v , uk). Need to account for the

correlation between uk and v .

Introduction of the inverse of the Mill’s ratio as a supplementaryexplanatory variable

E (v |X ,T = 1) =ϕ (Zγ − C39)

Φ (Zγ − C39)

in the treatment equation (T = 1) and it equivalent in thenon-treatment equation (T = 0).


Endogeneity Issues

The treatment effect on the treated can be reconstructed from thecoefficients estimated on equation (0) :

ETT = E (Y1|T = 1)− E (a0 + Xb0 + ρ0σ0)ϕ (Zγ − C39)

Φ (Zγ − C39)

Test of unobserved heterogeneity : ρ0σ0 = 0. If ok, OLS are properestimates of the effects.

Test of treatment effect heterogeneity : ρ0σ0 = ρ1σ1

Indirect effect of the minimum wage : Rise of the minimum wagespecific to 39-hours firms. Magnitude of this effect can be inferredfrom the coefficients estimated in equation (0), by replacing theactual cost evolution by the one that would have been realizedwithout the workweek reduction policy.


Endogeneity Issues

Effects of the workweek reduction on the TFP

Mill’s ratio Maximum LikelihoodParameter St. Dev. Parameter St. Dev.

Correlations

ρ0 0.085 (0.122) 0.031 (0.117)ρ1 0.268 (0.151) 0.566 (0.027)ρ1σ1 − ρ0σ0 0.0424 (0.0420) 0.149 (0.030)

Effects

ETT -0.071 (0.051) -0.049 (0.048)ETNT -0.144 (0.035) -0.413 (0.031)EMT -0.122 (0.048) -0.223 (0.018)


Endogeneity Issues

The case of Employment

The wage cost evolution should economically affect firm’semployment : it can not be used as an instrumental variable.

However, this variable should only affect firms who have reduced theirworkweek. Thus, it remains a valid instrument for firms who havestayed 39 hours.

Only the unobserved heterogeneity bias can be adressed.

An other issue : the control group may be affected by an indirecteffect, the rise of the hourly minimum wage.The minimum wage being indexed on average blue-collar hourly wage,the workweek reduction had an increasing impact on hourly wages.Minimum hourly wage did not apply in firms that had reduced theirworking time.


Endogeneity Issues

Effect of the workweek reduction on employment

Mill’s ratio Maximum LikelihoodParameter St. Dev. Parameter St. Dev.

ρ0 0.006 (0.132) -0.004 (0.138)Cost induced by -1.509 (0.252) -1.510 (0.029)minimum wage riseETT 0.097 (0.019) 0.101 (0.064)

Comments

No possibility to assess the effect of the treatment on non-treated

True effect of the minimum wage, but slight, around 0.9% of theemployment effect.


Conclusion

Interpretation of the results

Consider a production function : Q (K , L) = PGF .K 1−βLβ .

Firm’s profit is Π = min(Q,Q (L)

)− wL

Let L∗ be the optimizing production employment level.

Two situations :

Q ≤ Q (L∗), the firm is unconstrained, classical model.

∆ ln L∗ =∆ lnPGF −∆ lnw

1− β

Q < Q (L∗), the firm is constrained, Work Sharing Model.

∆ ln L∗ = −∆ lnPGF

β


Conclusion

Tests

Aubry I subsidized Aubry II forerunner Aubry IIParameter St. Dev Parameter St. Dev Parameter St. Dev

Employment growth 9,6 (0,34) 3,31 (0,73) 4,97 (0,38)Classical Model

Subsidies Effect 16,95 (0,28) 9,29 (0,54) 2,65 (0,27)Wage slowing Effect 11,58 (1,24) 10,52 (2,66) 6,51 (1,34)Productivity loss effect -18,09 (1,57) -9,98 (3,37) -3,4 (1,76)Test of the model -0,84 (1,21) -6,51 (2,58) -0,78 (1,37)

Work Sharing ModelWork Sharing Effect 4,64 (0,39) -2,48 (0,84) 0,81 (0,45)Test of the model 4,96 (0,47) 0,84 (1,03) 4,16 (0,5)

Comments :

Work Sharing model rejected for Aubry I and Aubry II.

The stronger increase of employment in 35-hours firms is mainlyrelated to the measures that have limited the increase in wage costs.Indeed, 35-hours firms have gained from this since productivity losseshave been more than compensated by wage cost diminution (throughwage slowing and subsidies).


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