Firm-Level Effects of Reductions in Working Hours

How do legislative reductions in hours impact firms? In this paper, we use matched employer-employee data to evaluate a policy reform in Portugal that unexpectedly reduced the usual weekly working hours from 44 to 40 hours. Using a difference-in-differences approach that exploits initial heterogeneity across collective agreements covering workers, we show that the reform led to a significant drop in working hours in treated firms, while salaries did not adjust, resulting in higher wages per hour. We observe only a small and insignificant negative effect on employment, as treated firms are able to maintain or even increase sales despite the fall in labor input (total hours worked within a firm). We show that this partly reflects higher prices rather than higher (or constant) volumes, whereby firms are able to shift the higher labor costs onto consumers.