Working-Time Regulation, Firm Heterogeneity, and Efficiency

A labour-matching economy with ex post heterogeneous firms is presented. When bargaining over the wage, firms and workers do not know the level of product demand. Once demand is realized, hours of work are chosen. We show that the existence of a legal workweek may enhance efficiency with respect to laissez-faire: while laissez-faire is good at allocating hours across firms, regulation may be better at reproducing optimal hours. Shortening the legal workweek raises employment and is Pareto-improving if and only if the demand faced by low-demand firms and/or the overtime premium are small enough.