Working hours reduction, financial constraints, and employment: Evidence from Korean firms

This study analyzes the effect of reducing working time to a 40-hour week standard on employment, using the data of 1,961 publicly traded firms in Korea. The objective of the study is to empirically estimate the economy-wide effect of this working hours reduction on employment in Korea. This paper also attempts to uncover the effect of financial constraints, defined as the degree of accessibility to finance, on employment stability or sustainability. Some economic theories suggest that financial constraints have mixed or conflicting effects on employment. Building on labor and finance literature such as Garmaise (2007), easing financial constraints helps firms to optimally substitute capital for labor, thereby decreasing employment. Likewise, financially constrained firms are limited by the availability of internal funds, and a decrease in the external financing cost will increase firm-level human resource investment, such as employment. Using a longitudinal data on publicly listed companies in Korea, the author examines variations in the timing of implementing the working hours reduction in terms of establishment size to see if the effect of working hours reduction on employment differs with the degree of financial constraints of firms. This paper finds that the economy-wide effect on employment of work-hours reduction is positive, approximately 3.5% increase in employment. The results, however, show that there is no effect of the working hours reduction on employment in less financially constrained firms or larger corporations, whereas a substantial positive effect on employment is in smaller firms or financially constrained firms, supporting the Garmaise's prediction.