Labor Market Responses to Legal Work Hour Reduction: Evidence from Japan 1

Transcription

1 Labor Market Responses to Legal Work Hour Reduction: Evidence from Japan 1 Daiji Kawaguci 2 and Hisairo Naito 3 and Izumi Yokoyama 4 December 27, Tis paper is a part of te researc program by te Economic Social Researc Institute (ESRI) of te Cabinet Office. Special permission was granted by te Ministry of Internal Affairs and Communications to use micro data from te Basic Survey of Wage Structure. We tank Yuko Ueno of te Cabinet Office for er assistance in te data application process. Statistical analysis based on te Basic Survey of Wage Structure was exclusively implemented by Daiji Kawaguci and Hisairo Naito. We appreciate te comments from Hideiko Icimura, Saciko Kuroda, Ryo Nakajima, Isao Yamamoto, and seminar participants at te ESRI of te Cabinet Office, te RIETI labor study group, te RIETI labor law and economics group, te OEIO conference at te University of Tokyo, and te 2008 Asian Conference on Applied Micro-Economics/Econometrics. 2 Faculty of Economics, Hitotsubasi University. 3 Graduate Scool of Humanities and Social Sciences, Te University of Tsukuba. 4 Department of Economics, Te University of Micigan.

2 Abstract Japan s labor standard law defines weekly legal work ours, and employers must pay a 25- percent wage premium for overtime. Te number of legal work ours was 48 in 1987 and gradually declined to 40 by During te corresponding period, te average weekly ours of work dropped from 45 to 41, suggesting te causal effect of legal regulation on te actual ours of work. Exploiting te different timing of te regulation cange by industry and establisment size, tis paper estimates te causal impact of legal work our reduction on labor market outcomes. Te analysis results indicate tat a one-our reduction of legal work ours led to a reduction of 0.14 actual ours worked, but it was not accompanied by a reduction in montly cas earnings. Te recruitment of new scool graduates was suppressed in response to an increase in te ourly wage rate. JEL Classification: J23 (Labor Demand); J80 (Labor Standards: General) Keywords: Work Hour Regulation; Labor Standard Law; Overtime Premium; Hours of Work; Japan

3 1 Introduction Setting legal standard work ours as long been used as a policy tool to reduce te actual ours worked, and recently it as attracted attention as a tool to attain employment creation troug work saring. Wit long work ours compared wit oter developed countries as a background (Estevao and Sa (2008)), te revision of te Labor Standard Law tat sets work our regulation is vigorously debated in Japan (Ogura (2007)). In contrast to te interest in te effect of work our regulation on actual work ours, teoretical works reveal tat te effect of legal work ours on actual work ours depends on te parameter values of te production function and te fixed cost of employment, even in a perfectly competitive labor market were ourly wage rate is exogenously given (Calmfors and Hoel (1988) and te references terein), and even more fundamentally, te structure of te labor market, weter wage rate is exogenously determined or not ((Boeri et al., 2008, Capter 4)). In response to te need for empirical works to gauge plausible effects, several papers ave emerged to examine its actual effects. 1 Hunt (1999) examines te effect of te reduction of standard work ours from 40 to 35 in Germany from te mid 1980s to te mid 1990s. Se finds tat a one-our reduction of standard work ours reduces te actual work ours by 0.8 to 1 our. Tis reduction of actual work ours was not fully compensated for by a reduction in montly salary, and it resulted in an employment reduction because te ourly wage rate increased. Crepon and Kramarz (2002) examines te Frenc case of 1981 tat reduced te standard ours from 40 to 39 witout allowing for a reduction of weekly pay for existing workers. Tey found tis law cange reduced employment among workers wo worked 40 ours before te reduction of standard ours and induced te workers turnover 1 Several studies examine te effect of sceduled work ours on actual ours worked in te Japanese context. Brunello (1989) set up an macroeconomic model in wic ours, employment, and earnings are simultaneously determined wit exogenous sceduled work ours. He fits te model to a macroeconomic timeseries between 1973 and From te estimated parameters, e obtains a prediction tat te reduction of legal work ours will prolong actual work ours, increase earnings, and reduce employment. Niimi (1998) and Saito and Tacibanaki (2002) examine te effect of te reduction of sceduled work ours on te level of employment assuming te exogeneity of sceduled work ours. Niimi (1998) concludes tat te reduction of legal work ours reduces employment, but Saito and Tacibanaki (2002) obtains te opposite prediction. Tese works do not explicitly discuss ow legal work ours determine sceduled work ours. 1

4 tat replaces workers wit existing contracts wit workers wit new contracts. Estevao and Sa (2008) examines additional standard our reduction from 39 ours to 35 ours in France between 2000 and 2002 and finds tat standard our reduction reduced actual ours worked and increased ourly rate of pay and job workers turnover. Raposo and van Ours (2008) finds similar results for 1996 revision of labor standard law in Portugal tat reduced workweek from 44 ours to 40 ours. Skuterud (2007) examines te case of Quebec, Canada tat reduced legal work our from 44 ours to 40 ours between 1997 and 2000 and finds effect on actual ours worked, but no effect on employment. Hamermes and Trejo (2000) examines te effect of an introduction of an 8 ours per day limit for men in 1980 in addition to a pre-existing 40 our per week limit in California and concluded tat te work our regulation effectively reduced ours worked per day. It is wort noting tat none of tese studies directly support te effectiveness of work-saring. Given burgeoning empirical literature on te effect of te legal work our on actual ours worked, tis paper contributes to te literature by examining te Japanese experience from 1988 to 1997, wic offers a very nice natural experiment. Japan experienced intense criticism for its large current account surplus in te early 1980s, and te government responded to tis criticism by reducing domestic production troug work our reduction. Te government revised te labor standard act in 1987; before te revision, te number of legal work ours was set at 48 per week and 8 per day, but te weekly legal work ours were gradually reduced to 40 by Te ours worked exceeding tis legal limit sould be compensated by at least a 25-percent premium. Te timing of te legal work our reduction differed across industries and establisment sizes. Figure 1 indicates te time series of te weigted average of legal work ours weigted by workers composition by industry and establisment size for mining, construction, manufacturing, and public utility industries. Te figure also includes te average work ours of all workers in te industries. Tis figure seems to suggest te causal effect of te legal work our on te actual ours worked, but te macroeconomic condition also canged dra- 2

5 matically during te corresponding period. Te Japanese economy started contracting from , and tis almost coincided wit te reduction of actual work ours. To identify te effect of te legal work ours on actual work ours, we exploit te eterogeneous timing of te reduction of legal work ours by industry and establisment size. Analysis results based on repeated cross-sectional data from te Basic Survey of Wage Structure suggest tat te current legal work ours assigned to specific industries and establisment sizes ad modest effects on actual ours worked. Te most-preferred specification tat allows for year-, industry-, and establisment size-specific effects indicates tat a reduction of one legal work our led to 0.14 fewer actual ours worked. Sortened legal work ours reduce actual ours worked, but tey virtually do not affect te montly salary. Tere is no sign of maneuvering te straigt wage rate or bonus payments to neutralize te effect of legal work our reduction. Anecdotes suggest tat reducing te montly wage of existing workers in accordance wit te work our reduction was extremely difficult at te time because of opposition by workers and labor unions. Te reduced work ours witout a montly pay reduction resulted in an increase of te ourly wage rate. Te adjustment took place at te margin of te recruitment of new scool graduates. Te fraction of newly recruited workers from scool to existing permanent employees was reduced by 0.1 percentage point in response to te one-our reduction of te legal work our, wile te average new recruitment rate between 1989 and 1999 was around 5 percent. Tis paper is organized as follows. Section 2 reviews te legal setting of Japan s legal work our. Section 3 lays out a teoretical discussion on te possible effects of te legal work our on actual work ours. Section 4 discusses te econometric identification strategy. Section 5 introduces te data set. Section 6 reports te estimation results. Section 7 furter discusses te effect of work our regulation on montly wage and te new recruitment of workers. Te last section concludes. 2 see Motonisi and Yosikawa (1999), Hayasi and Prescott (2002) and Kobayasi and Inaba (2006) for various explanations. 3

6 2 Legal Institution on Work Hour in Japan Japan s labor standard law proibits employers from employing workers exceeding te daily and weekly legal work ours. Te current legal work ours are 40 per week and 8 per day (Article 32). Employers can allow employees to exceed tese legal limits only under an agreement wit a workers representative tat represents te majority of employees. Tis agreement is called te Article 36 agreement because Article 36 of Labor Standards Law defines exceptions to te legal work our standard. Overtime work ours under tis agreement sould be compensated by at least a 25-percent wage premium (Article 37). 3 Te weekly legal work ours ad been set at 48 per week until 1987 and ten gradually declined to 40 by In response to diplomatic pressure to reduce te current account surplus, prior to te Tokyo summit of May 1986, te Japanese government establised a clear policy goal to set a standard of 40 work ours per week. In accordance wit tis policy goal, te Labor Standard Law was revised in 1987 and implemented from April 1, Moratorium periods were given depending on industry and establisment size, and tis transition is summarized in Appendix Table 1. Te moratorium periods ended by Marc 1997, by wic time te standard work ours ad become 40 ours per week uniformly across industries and establisment sizes wit a few exceptions. 4 Anoter important legal standard was set by te Temporary Act for te Promotion of Work Hour Reduction, wic is often called Jitan Sokusin Ho, enacted on September 1, Te law was effective for five years and offered tree legal provisions. First, te law promoted te formation of an establisment-level committee, wic consisted of employer and employee representatives, for work our reduction. Te agreement in te committee tat is submitted to local labor standard office becomes a legally binding contact as a usual 3 See (Sugeno, 2002, Capter 3 Section 5) for an overview of te Japanese legal system on work ours. 4 Exceptions apply to small establisments tat usually ire less tan 10 employees in commerce and service industries. In addition, te workers in managerial-supervising positions are exempted from te work our regulation, and for tose workers, overtime work ours and overtime compensation are not recorded (Article 41). Te definition of te managerial-supervising position is rater vague, and tere are accumulated court cases over tis definition. 4

7 labor agreement (Rousi Kyoyaku). Second, te law provided te potential exemption from te Antitrust Law for te employers collusion in an effort to reduce work ours. Tis exemption was provided because establisments may exceedingly compete for quick service, and tis excess competition may result in long working ours. Tird, te law establised a subsidy sceme tat provided up to 3 million yen (about 30 tousand US dollars) to promote labor-saving capital investment for establisments tat ired up to 300 regular employees. Tis paper abstracts from te effect of Jitan Sokusin Ho, but te law s effect sould be absorbed by year dummy variables or te interaction terms of year and establisment size dummy variables. 3 Teory Tis section discusses te effect of legal work ours on te actual ours worked and employment based on a simple static labor demand model, as in Calmfors and Hoel (1988) and Hunt (1999). Assume te firm produces output by using labor and capital and it faces an exogenous wage rate (w), rental rate of capital (r). Te firm cooses te ours of work per worker (), employment (N), and capital (K) given legal work ours ( ), te overtime premium (p), and te fixed cost of employment (f). Te firm produces output sold at a unit price using a given tecnology expressed as a production function g(, N, K). Te firm solves te following profit maximization problem: max g(, N, K) wn fn pw max(0, ( ))N rk. (1),N,K Te reduction of legal work ours increases te marginal cost of labor, and tis reduces employment troug te scale effect. In addition, te increase of te marginal cost of labor causes a substitution to capital. Te isoquant and isocost curves on te our and employment planes are drawn in Figure 2. Tis figure also indicates ow te isocost curve canges wen te number of legal work ours is reduced. 5

8 Figure 3 illustrates te results of comparative statics for te reduction of legal work ours. Case 1 considers te case in wic te optimal ours are above te legal work ours before and after te legal work our revision (i.e., > 0 > 1 ) because of ig fixed costs. Te first-order conditions regarding labor inputs are given as: g (, N, K) = MC = wn + pw, g N (, N, K) = MC N = w + f + pw( ). (2) Te marginal cost of employment MC N increases, wile te marginal cost of our MC does not cange, in response to te reduction of legal work ours. Tis induces te substitution of employment to our. Tus te reduction of legal work ours unambiguously reduces employment because of te scale effect and te substitution to our (and capital). Te effect on our depends on weter te sum of te scale effect and te substitution effect to capital exceeds te substitution effect from employment. By contrast, if te initial number of legal work ours does not bind but te number of revised legal work ours does (i.e. 0 > > 1, Figure 3 Case 2), te first-order conditions evaluated around te revised legal work ours becomes: g (, N, K) = MC = wn if 1, = wn(1 + p) if > 1, g N (, N, K) = MC N = w + f if 1, = w + f + pw( 1 ) if > 1. (3) Te discontinuities of te marginal costs of our and employment at legal work ours create an incentive for a firm to set te actual ours at legal work ours. Tus, employment substitutes for ours of work. Because of te scale effect and substitution effect to capital, te ours of work unambiguously fall. Te effect on employment depends on te relative 6

9 size of te substitution effect between ours and employment, and te sum of te scale effect and te substitution effects to capital. Te analysis of te static model reveals tat te reduction of legal work ours is more likely to reduce actual ours worked wen 1. te fixed cost of employment is small (i.e., te legal work our is initially not binding), 2. te scale effect is large (i.e., te labor cost sare is large and product demand is price elastic), and 3. te capital substitution is large (i.e., te elasticity of substitution between labor and capital is large and capital supply is price elastic). Te dynamic structure of te legal work our reduction adds anoter complexity to our analysis. Te legal work our reduction in Japan in te late 1980s and early 1990s took place gradually wit moratorium periods, and te scedule of te legal work our reduction was known in Te adjustment cost of work ours could be ig because it involves a reorganization of te work scedule and a full revision of te employment contract. If te cost of te work our adjustment is sufficiently large, te employer is likely to reduce te actual work ours only once after te first reduction of legal work ours. Suppose tat an employer experiences a 2-our reduction in te legal work ours tis year and expects an additional 2-our reduction in 2 years. If te lump-sum adjustment cost is sufficiently ig, te employer reduces te work ours by 4 ours so tat te employer pays te adjustment cost only once, and not twice. In tis situation, te steady state legal work our, instead of te current legal work our, affects te actual work ours once te employer experiences te legal work our cange. 4 Identification Strategies Te cange in te actual ours of work in response to te cange of legal work ours can be examined by estimating te following regression model, wic was also employed by Hunt (1999). ijst = α jst + D j + D s + D t + D j D s + D j D t + D s D t + u ijst, (4) 7

10 were ijst is actual ours worked. Te subscript i is for individual, j for industry, s for establisment size, and t for year. Legal work ours is denoted as jst defined by industry, establisment size, and year. Te dummy variables are included for industry, establisment size, and year to capture industry, establisment size, and year-specific macroeconomic socks. In te actual implementation, we gradually add te dummy variables to examine wic level of aggregate sock is te crucial determinant of work ours tat is correlated wit legal work ours. Additional identification information can be obtained from te eterogeneity of te initial work our distribution across industries and establisment sizes. Te teory in te previous section predicts tat te reduction of legal work ours reduces actual ours worked troug te substitution effect wen legal work ours are initially not binding but become binding after te revision. Te data set does not allow us to directly test tis prediction at te establisment level because it does not ave a panel structure. We instead use te industry, establisment size, year-level fraction of workers for wom te work our regulation was initially not binding but becomes binding after te revision. Te fraction of workers wose work ours are below te current legal work ours but above te revised legal work ours in industry j, establisment size s in year t is denoted as fa jst. Te estimation equation becomes: ijst = α 1 jst + α 2 jst fa jst 1 + α 3 fa jst 1 + dummy variables + u ijst. (5) Te teory predicts α 2 > 0 troug te substitution effect because te iger te fraction of affected workers, te more effective te work our regulation is. If te reduction of work ours in response to te legal work our reduction is mainly caused by te scale effect, α 1 > 0, but α 2 = 0 olds. We furter consider te econometric model tat takes a dynamic adjustment into consideration. Te econometric model tat allows for te lump-sum adjustment cost of work 8

11 ours becomes: were ijst = α adj jst + dummy variables + u ijst, (6) adj adj jst = 48 if te legal work our is not yet revised and jst = 40 once te legal work our is revised. Tis specification embodies te teoretical prediction tat te adjustment of work ours takes place at one time witout a gradual adjustment. 5 Data Te data set used in tis study is micro data from te Basic Survey on Wage Structure (BSWS), compiled annually by te Japanese government between 1989 and Tis survey is conducted in June of every year and includes observations randomly cosen from almost all regions and industries in Japan except for agriculture. Te annual number of observations is approximately 1.5 million workers from tousand establisments. Te sample includes all establisments wit 10 or more employees in bot private and public sectors and all establisments tat belong to private firms wit 5 to 9 employees. Te establisments in te sample are randomly cosen in proportion to te size of prefectures, industries, and number of employees from te Establisment and Enterprise Census (EEC ereafter), wic lists all establisments in Japan. 6 Te randomly selected establisments were asked to extract teir workers information from teir payroll records. 7 Te establisment and individual files were merged using an establisment identification number. Te unit of analysis is an individual worker wit relevant information from te establis- 5 Having a cross-section before te initial reduction of te legal work our before 1998 would ave been ideal, but te data before 1989 were not available for tis project. 6 Tis list is revised every 2-5 years. Of te years relevant to our analysis, te lists were revised in 1986, 1991, 1994, 1996, 1999, and Te BSWS sample is randomly picked from te 1986 EEC list, te sample is from te 1991 list, te sample is from te 1994 list, te sample is from te 1996 list, and te sample is from te 1999 list. Wile te sampling is based on te same list, about alf of te establisments are cosen in two consecutive years, but only about 1/10 of te establisments in te sample are picked at te time of te list revision. We sould recognize te large discontinuity of te analysis sample at te times of te list revision: 1993, 1996, 1998, and A person in carge of personnel matters in eac establisment was asked to randomly coose a number of workers from its pool of employees based on te given instructions for random sampling, including te sampling probability, wic depended on te establisment s size and industry. 9

12 ment to wic e/se belongs. Among te variables related to work ours, sceduled work ours and overtime work ours in June are available. Oter variables include eac worker s sceduled montly payment in June, overtime payment in June, bonus payment of te previous calendar year, age, sex, educational attainment, full-time/part-time status, type of work or job, employment status (wit or witout permanent status), working days/ours, as well as te firm s attributes, including te number of permanent workers (Joyo Rodo Sa) 8, firm size, industry, and location. Table 1 reports te descriptive statistics of te analysis data. Te weigted average of legal work ours declined to 40 in 1999 from in Weekly actual ours worked also decreased from in 1989 to in Wile ours worked declined during te period, montly sceduled cas earnings and annual bonuses increased during te corresponding period. Accordingly, te imputed ourly wage rate increased from 1,645 yen to 2,345 yen between 1989 and Figure 4 compares te distribution of actual ours worked (=sceduled work ours + overtime work ours) in 1989 and Te distribution apparently sifts to te left and becomes less dispersed. Figure 5 examines compliance to te overtime pay premium regulation. Labor standard law requires employers to pay a wage premium of between 25 and 50 percent to compensate for overtime. To examine compliance to tis regulation, te overtime wage premium is calculated by te ourly wage for overtime (= unsceduled wage in June / unsceduled work our in June) divided by te ourly wage for sceduled work ours (= (sceduled wage in June - legal allowances) / sceduled work ours in June). In tis calculation, tose workers in managerial-supervising positions wo are exempted from te work our regulation are not included in te sample because overtime work ours and wage payment are not recorded. Te mode of te distribution is 1.25, but many workers do not receive te 8 Tose workers wo satisfy one of te following tree criteria are classified as permanent workers: 1. on contracts tat do not clearly specify a contractual time period, 2. on contracts tat last more tan a mont, or 3. on contracts tat last less tan a mont, but on wic te workers worked 18 or more days in te last two monts. Tis classification includes part-time workers if one of te criteria above is satisfied. 10

13 expected overtime premium. Tis seemingly noncompliance to te law is partly because te work ours exceeding sceduled work ours are not necessarily work ours exceeding te legal work ours, but a portion may result from noncompliance to te law. Te noncompliance to te law attenuates te effect of te legal work our on actual work ours. By contrast, in a significant number of cases te overtime wage premium exceeds 25 percent. Tere are several reasons for tis. First, employers must pay at least a 35-percent oliday wage premium for aving workers work on olidays. Second, at least a 25-percent wage premium sould be paid for te work scedule tat takes place between 10 p.m. and 5 a.m. as a midnigt premium. A midnigt premium sould be added on to te usual overtime or oliday premium if te overtime or oliday work takes place during te aforementioned period, and tus te total of te legal premium goes up to 60 percent. 6 Results on Hours Worked Table 2 reports te results of te regressions of actual ours worked on legal work ours wit several specifications. Te estimated coefficient of reported in Column 1 implies tat a one-our reduction of legal work our reduces te actual work our by about 30 minutes. Tis relationsip is robust even after controlling for industry and establisment eterogeneity, as reported in Columns 2, 3, and 4. However, once te year effects are allowed for, te coefficient dramatically drops to 0.140, as reported in Column 5. Tis implies tat a one-our reduction in te legal work ours reduces te actual ours worked by a mere 8.4 minutes (= ). Tis coefficient is rater stable after including year and industry interaction terms and industry and size interaction terms, as reported in Columns 6 and 7. Te coefficient furter drops to after including size and year interaction dummy variables, but tere is not muc variation in legal work our for tis specification. If we take as te causal effect, among 4 actual work our reductions between 1989 and 1999, about a 1-our reduction (480 minutes 0.140) was attained by te reduction of legal work ours. 11

14 Te effect of te legal work our reduction on actual ours worked sould depend on te fraction of workers wo are directly affected by te cange of legal work ours, if te substitution effect is important. Table 3 reports te regression results tat include te interaction terms of legal work ours and te lagged fraction of workers wo are affected by te reduction of work ours. Te results are mixed, but te results in Columns 5, 6, and 8 confirm te teoretical prediction tat te effect is stronger in te industries and establisment sizes were te fraction of workers wo are affected by te cange in legal work our is ig. However, te results are of weak statistical significance and rater suggestive for te importance of te substitution effect. By contrast, te straigt effect of legal work ours on actual ours worked continues to be significant in a robust way, and tis is suggestive for te relative importance of te scale effect. Table 4 reports te regression results tat allow for a specific form of adjustment for ours worked wit dynamic consideration. Te explanatory variable is eventual legal work ours tat takes 48 ours before te legal work our revision and 40 ours after te revision. If establisments adjust teir work ours toward 40 ours once te reduction of legal work our applies, tis explanatory variable sould pick up its effect. Te estimated coefficients are similar to te ones reported in Table 2, but once te year dummy variables are included, te coefficient virtually becomes zero, as reported in Columns 5 troug 8. Te dynamic adjustment consideration does not seem to be an important explanation for wy te estimated coefficients reported in Table 2 are small. Previous studies point out tat tere is nonnegotiable unrecorded ours of work in Japan (Takaasi (2005) and Ogura (2007)) and one migt wonder ow tis unrecorded ours of work affect te previous estimates. We infer tat its effect is minimal because te gap between employers reported ours of work and employees reported ours of work based on two independent government surveys ad been almost stable during te period of legal cange, wic is (Takaasi (2005)). Furtermore, to address te concern, we estimate te our equation only using production workers as analysis sample because unrecorded ours 12

15 of work is presumably negligible among production workers. Table 5 reports te results of regression and we confirm tat te coefficients are almost identical to te results reported in Table 2 wile te size of coefficients get sligtly larger. 7 Effects on Wage and Employment 7.1 Effects on Montly Wage Te teoretical analysis in te previous section assumed tat te firms are wage takers operating in a perfectly competitive market. In te presence of friction in te labor market, owever, firms and workers could potentially negotiate a package of total compensation and work ours. Witin tis negotiation framework, Trejo (1991) points out tat efficient negotiations between firms and workers nullify te work our regulation because firms and workers continue to contract on te identical package of total compensation and work ours. He finds evidence for tis in te US. In contrast, Hunt (1999) finds tat montly pay ad not canged wen actual ours declined in te mid 1980s in Germany and, as a result, te effective ourly wage increased. Nymoen (1989) also found tat, in te sort run, te reduction of work ours increased ourly wage based on Norwegian time-series data. Pencavel and Holmlund (1988) finds a similar result based on Swedis data. To examine te effect of te tigter work our regulation on montly total compensation, wic is defined as sceduled wage and overtime wage in June plus bonus payments in te previous year/12, is regressed upon te legal work ours. Te results of regressions for several specifications are reported in Table 6. Te specifications witout year effects render negative coefficients, but te specifications wit year effects, reported in Columns 5 troug 8, indicate tat te tigter work our regulation ad decreased montly total compensation, but te estimates are not statistically significant except for te specification reported in Column 7. Te size of te coefficient, wic is 0.004, is very small because wen te legal 13

16 work our is reduced by one our, wic is a 2.5-percent reduction from 40 ours, montly pay is reduced by 0.4 percent. Te elasticity is about Combined wit te previous findings tat te tigter work our regulation reduced te actual ours worked, te reduction of te legal work ours resulted in an increase of te ourly wage rate. To furter investigate te reasons wy montly total compensation ardly canged in response to te reduction of te legal work ours, te montly compensation is divided into regular montly salary and bonus parts, using te following relationsip: ln(sceduled Wage + Overtime Wage + Annual Bonus/12) = ln{(sceduled Wage + Overtime Wage) (1 + Annual Bonus/12 Sceduled Wage + Overtime Wage )} ln(sceduled Wage + Overtime Wage) Annual Bonus/12 + Sceduled Wage + Overtime Wage. Te approximation ln(1 + ρ) ρ is used to derive te tird line. Te log of montly cas earnings and te fraction of bonus to montly wage are separately regressed on te legal work our to decompose te legal work our s effect on montly total compensation. Table 7 reports te results for te regressions of montly wage, including overtime pay, on legal work ours. Te specifications wit year dummy variables report tat te tigter legal our restriction was associated wit te reduction of montly wage, but tese estimates are not statistically significant, except for a specification in Column 7. Table 8 reports te results for te regressions of te fraction of bonus to montly wage on legal work ours. All te estimated coefficients are almost zero. Overall, neiter montly wage nor te bonus fraction responds to te cange of te work our resection in a significant way. Combined wit evidence tat te reduction in te legal work our reduced te actual ours worked, te reduced legal work our increases te ourly 14

17 wage rate, or ourly labor cost. 7.2 Effects on Hiring New Scool Graduates Increased ourly wage induced by te reduction in legal work ours may ave reduced te number of employees. Te Basic Survey of Wage Structure is not designed to provide panel data and basically cannot capture cange in te number of employees over time. However, it includes information on te number of workers wo are newly recruited from scools by types of scools (junior ig scool, senior ig scool, junior college (Tandai)/tecnical college (Kousen), four year college) at eac establisment. Tese numbers are added up to obtain te total number of newly recruited workers from scools, and tis total is divided by te total number of permanent employees to obtain te fraction of newly ired workers among permanent workers as an establisment-level variable. Te fraction of workers wo are newly ired from scools among permanent workers may vividly capture te labor input adjustment because tis is te margin were te adjustment cost is presumably minimal. Table 9 reports te regression results of te fraction of newly ired workers among permanent workers on legal work ours. All te estimated coefficients indicate tat te reduction of legal work ours reduces te fraction of newly ired workers. According to te specification tat allows for straigt industry, establisment size, and year effects indicates tat a one-our reduction in te legal work our reduces te fraction of new iring by percentage point. Te eigt-our reduction of legal work ours between 1988 and 1999 results in more tan a one-percentage point reduction in te iring of new graduates from scools. Te accumulated effect is non-negligible, considering te fact tat te fraction of newly ired workers among permanent workers is about 5 percent during te analysis period. Te Basic Survey of Wage Structure also records te total wage bill tat went to newly ired workers from scools. Dividing tis figure by te number of workers recruited from scools, te average montly wage for newly ired workers is calculated. Average montly wages of newly ired workers from scools by education groups are regressed on te legal 15

18 work our. Table 10 reports te results of te regression, and te estimated coefficients for te specifications wit industry, establisment size, and year dummy variables imply tat te reduced legal work ours ad no impact on te montly salary of newly recruited workers from scools. Tis nominal rigidity may well ave amplified te quantity adjustment. 8 Conclusion Tis paper examined te effect of te weekly legal work our reduction on actual work ours troug bot teoretical and empirical analysis. Te teoretical analysis wit exogenous wage revealed tat weter te reduction of te legal work our reduces te actual work ours critically depends on production tecnology, including te fixed cost of employment and te elasticity of substitution between te ours of work and te number of workers. Te empirical examination exploited a natural experiment in Japan; te number of legal work ours was reduced from 48 in 1988 to 40 in Te analysis, based on micro data from te Basic Survey of Wage Structure, revealed tat te reduction of legal work ours modestly reduced actual ours worked. Te most preferred estimate implies tat a one-our reduction in te legal work ours reduced actual work ours by 0.14 our, or 8.4 minutes. Tus an 8-our reduction in te legal work ours ad reduced work ours by 1 ours and 7 minutes. Tis is a modest effect, considering te fact tat actual work ours ad declined by 4 ours and 20 minutes: from 44 ours and 40 minutes in 1989 to 40 ours and 20 minutes in Te effect of te legal work our reduction on actual ours worked is not necessarily stronger in industries were a iger fraction of workers are affected. Tis finding suggests te relative importance of te scale effect rater tan te substitution effect, contrary to policymakers intentions. Wile te reduction of te legal work our modestly reduced te actual ours worked, it did not decrease montly compensation to workers, even after taking bonus payment into account. As a result, te effective ourly wage increased after te legal work our reduction. Tis increase in ourly wage reduced new recruitment from scools. Tis set of results is 16

19 similar to te German experience in te 1980s reported by Hunt (1999). Nominal montly wage rigidity increased te ourly wage rate in response to a legal work our reduction, even witout an explicit legal provision tat employers could not reduce total weekly or montly pay in accordance wit te reduced ours worked, as was te case in France (Crepon and Kramarz (2002)). Tis mecanism could well be one of te reasons wy work-saring policies does not seem to work well in many countries, as pointed out by Freeman (1997) and Kapteyn et al. (2004). As for Japanese macroeconomic implications, te finding in tis paper is consistent wit tat of Niimi (1998), indicating tat te reduction of sceduled work ours does not increase te number of employees. Te increased ourly labor cost may well ave contributed to te increase of te labor wedge, wic is te gap between te value of marginal labor product and te marginal rate of substitution between leisure and consumption. Kobayasi and Inaba (2006) pointed out te increase of labor wedge as a reason for te long-term stagnation of te Japanese economy during te 1990s and te early 2000s, based on business cycle accounting. In tis sense, tis paper offers additional evidence tat reduced legal work ours can partly explain Japan s recession in te 1990s, as claimed by Hayasi and Prescott (2002), but troug a different mecanism. References Boeri, T., M. C. Burda, F. Kramarz, P. Cauc, B. Crepon, D. S. Hamermes, O. N. Skans, T. Scank, G. van Lomwel, P. Weil, and A. Zylberberg (2008). Working Hours and Job Saring in te EU and USA. Oxford University Press. Brunello, G. (1989). Te employment effects of sorter working ours: An application to Japanese data. Economica 56 (224), Calmfors, L. and M. Hoel (1988). Work saring and overtime. Te Scandinavian Journal of Economics 90 (1), Crepon, B. and F. Kramarz (2002). Employed 40 ours or not employed 39: Lessons from te 1982 mandatory reduction of te workweek. Journal of Political Economy 110 (6), Estevao, M. and F. Sa (2008). Te 35-our workweek in france: Straigtjacket or welfare improvement? Economic Policy 23 (55),

20 Freeman, R. (1997). Demand Side Policies for Low-Wage Labor Markets, Capter Worksaring to full employment: serious option of populist fallacy? Russell Sage Foundation. Hamermes, D. S. and S. J. Trejo (2000). Te demand for ours of labor: Direct evidence from California. Te Review of Economics and Statistics 82 (1), Hayasi, F. and E. Prescott (2002). Te 1990s in Japan: A lost decade. Review of Economic Dynamics 5 (1), Te Quarterly Journal of Eco- Hunt, J. (1999). Has work-saring worked in Germany? nomics 114 (1), Kapteyn, A., A. Kalwiji, and A. Zaidi (2004). Te myt of worksaring. Labour Economics 11 (3), Kobayasi, K. and M. Inaba (2006). Business cycle accounting for te Japanese economy. Japan and te World Economy 18 (4), Motonisi, T. and H. Yosikawa (1999). Causes of te long stagnation of Japan during te 1990s: Financial or real? Journal of te Japanese and International Economies 13 (3), Niimi, K. (1998). Economic analysis on sort work our policy and work saring. Japan Researc Review. in Japanese. Nymoen, R. (1989). Wages and te lengt of te working day: an empirical test based on 30 Norwegian quarterly manufacturing data. Scandinavian Journal of Economics 91 (3), Ogura, K. (2007). Endless Workers. Nikkei Publiser. in Japanese. Pencavel, J. and B. Holmlund (1988). Te determination of wages, employment and workours in an economy wit centralised wage-setting: Sweden, Te Economic Journal 98 (393), Raposo, P. and J. C. van Ours (2008). How working time reduction affects employment and earnings. IZA Discussion Papers 3723, Institute for te Study of Labor (IZA). Saito, T. and T. Tacibanaki (2002). Empirical analysis on te possibility of work-saring in Japan. Nion Keizai Kenkyu 44, in Japanese. Skuterud, M. (2007). Identifying te potential of work-saring as a job-creation strategy. Journal of Labor Economics 25 (2), Sugeno, K. (2002). Japanese employment and labor law (Translated from Japanese by Leo Kanowitz ed.). Carolina Academic Press. Takaasi, Y. (2005). Economic background of wite collar workers unpaid overwork. Japanese Journal of Labor Studies 536, in Japanese. Trejo, S. J. (1991). Te effects of overtime pay regulation on worker compensation. American Economic Review 81 (4),

21 Table 1: Descriptive Statistics of te Analysis Data, , 4 Industries: Mining, Construction, Manufacturing, and Electricity, Gas, Heat supply and Water. Sample Total Legal Work Hours (2.87) (0.98) (1.98) 0.00 Actual Hours Worked (7.89) (8.41) (7.26) (7.34) Sceduled Hours (6.07) (6.34) (5.82) (5.57) Overtime (4.44) (5.05) (3.82) (4.20) Sceduled Cas Earnings ( ) ( ) ( ) ( ) Overtime Allowance (407.75) (386.92) (393.72) (411.13) Annual Bonus in Previous Calendar Year ( ) ( ) ( ) ( ) Hourly Wage Rate (14.41) (10.97) (15.09) (14.92) Establisment Size ( ) ( ) ( ) (921.91) Overtime Premium Rate (2.18) (1.74) (2.54) (2.43) Fraction of Workers Affected by Year, Industry, Establisment Size ( FA ) (8.25) ( - ) (8.63) (0.00) Fraction of Newly Hired Workers from Scools (%) (5.06) (5.65) (5.12) (4.01) Montly Wage of Newly Hired Workers from Scool (245.60) (182.42) (208.82) (223.69) Establisment Size: Industry Distribution: Mining (4 categories) Construction (3 categories) Manufacturing (22 categories) Electricity, Gas, Heat supply and Water (4 categories) Observations Note: Standard deviations are in parentesis. All te monetary compensation is denominated in 100 yen tat is approximately one US dollar. 19

22 Table 2: Te Effect of Legal Work Hours on Actual Hours Worked Dependent var. Actual Hours ( = Sceduled Hours + Overtime) (1) (2) (3) (4) (5) (6) (7) (8) Legal Work Hours (0.021) (0.015) (0.023) (0.016) (0.041) (0.032) (0.016) (0.068) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Standard errors robust against te clustering witin year industry size clusters (1772 clusters) are reported in parenteses. Actual ours worked is defined as sceduled ours plus overtime ours. Table 3: Te Effect of Legal Work Hours on Actual Hours Worked Exploiting te Variation of te Degree of Bind Dependent var. Actual Hours (1) (2) (3) (4) (5) (6) (7) (8) Legal Work Hours (0.028) (0.021) (0.030) (0.022) (0.047) (0.037) (0.020) (0.074) Legal Work Hours * Fraction Affected (0.003) (0.002) (0.003) (0.002) (0.003) (0.003) (0.001) (0.003) Fraction Affected (0.127) (0.091) (0.125) (0.085) (0.127) (0.128) (0.053) (0.113) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Standard errors robust against te clustering witin year industry size clusters (1598 clusters) are reported in parenteses. Fraction Affected is defined by year, industry, establisment size, and tis value is te fraction of workers wose work ours in te previous year are between te legal work ours in te previous year and te current legal work ours. Te sample size is reduced from Table 2 because 1989 observations are dropped and Bind is not defined for some cells because of missing observations. 20

23 Table 4: Te Effect of Legal Work Hours on Actual Hours Worked Incorporating a Dynamic Adjustment Dependent variable Actual Hours (1) (2) (3) (4) (5) (6) (7) (8) Eventual Legal Work Hours (0.026) (0.015) (0.026) (0.013) (0.020) (0.019) (0.008) (0.023) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Standard errors robust against te clustering witin year industry size clusters (1772 clusters) are reported in parenteses. Eventual Legal Work Hours takes 48 ours if te current legal work ours are 48 ours and takes 40 ours if te current legal work ours are below 48 ours. Table 5: Te Effect of Legal Work Hours on Actual Hours Worked among Production Workers Dependent var. Actual Hours Worked ( = Sceduled Hours + Overtime) (1) (2) (3) (4) (5) (6) (7) (8) Legal Work Hours (0.026) (0.017) (0.027) (0.017) (0.050) (0.040) (0.020) (0.127) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Standard errors robust against te clustering witin year industry size clusters (1249 clusters) are reported in parenteses. Actual ours worked is defined as sceduled ours plus overtime ours. 21

24 Table 6: Te Effect of Legal Work Hours on Montly Total Compensation Dependent variable ln (Montly Total Compensation) (1) (2) (3) (4) (5) (6) (7) (8) Legal Work Hours (0.003) (0.002) (0.003) (0.001) (0.004) (0.003) (0.001) (0.004) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Standard errors robust against te clustering witin year industry size clusters (1772 clusters) are reported in parenteses. Montly total compensation is defined as sceduled wage plus overtime wage plus one twelft of te bonus amount of previous calendar year. Table 7: Te Effect of Legal Work Hours on Cas Earnings in June Dependent variable ln (Cas Earnings in June) (1) (2) (3) (4) (5) (6) (7) (8) Legal Work Hours (0.003) (0.002) (0.002) (0.001) (0.004) (0.003) (0.001) (0.003) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Standard errors robust against te clustering witin year industry size clusters (1772 clusters) are reported in parenteses. Cas earnings in June is defined as sceduled wage plus overtime wage in June. 22

25 Table 8: Te Effect of Legal Work Hours on (annual bonus payment in previous year/12) / (cas earnings in June) Dependent variable (Annual Bonus Payment in Previous Year/12) / (Cas Earnings in June) (1) (2) (3) (4) (5) (6) (7) (8) Legal Work Hours (0.001) (0.001) (0.001) (0.000) (0.001) (0.001) (0.000) (0.002) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Standard errors robust against te clustering witin year industry size clusters (1772 clusters) are reported in parenteses. Cas earnings in June is defined as sceduled wage plus overtime wage in June. Table 9: Te Effect of Legal Work Hours on te iring ratio of New Graduates to Permanent Employees Dependent variable (Number of Hiring from New Graduates) / (Number of Permanent Employees) * 100 (1) (2) (3) (4) (5) (6) (7) (8) Legal Work Hours (0.022) (0.018) (0.013) (0.012) (0.040) (0.031) (0.026) (0.109) Industry No Yes No Yes Yes Yes Yes Yes Establisment Size No No Yes Yes Yes Yes Yes Yes Year No No No No Yes Yes Yes Yes Year Industry No No No No No Yes Yes Yes Industry Size No No No No No No Yes Yes Size Year No No No No No No No Yes N R-squared Note: Observation units are establisments. Standard errors robust against te clustering witin year industry size clusters (1636 clusters) are reported in parenteses. 23