Effective working hours and wages: the case of downward adjustment via paid absenteeism

This paper compares contractual with effective working hours and wages, respectively. Effective working hours are defined as contractual working hours minus absent working hours. This approach takes into account workers' downward adjustment of working time via paid absenteeism if working time constraints are present, which induce workers to accept contracts with larger than their optimal choice of working hours. A German personnel data set, which contains precise information on wages as well as working and absence hours, is used to assess the impact of such downward adjustment on wage inequality and wage differentials by gender, schooling, and age. The main results are: (1) Wage inequality is lower for effective than for contractual wages. (2) The gender gap in effective hourly wages is more than one percentage point smaller than the gender gap in contractual wages, because women are on average more absent than men. (3) Workers with lower schooling are more absent, which leads to an upward bias in estimates for rates of return to schooling when contractual instead of effective wages are used. (4) Older workers are more absent so that contractual age-earnings profiles are significantly flatter than effective age-earnings profiles.