A labor-adverse selection model of reducing working time

This paper proposes a labor-adverse selection model where labor quality within an individual firm negatively depends upon the average working hours in the market. Under this setting, labor quality is a "pure public good" by nature, and the free market equilibrium will result in inefficient allocation with underprovision. We show that shorter workweek regulations will increase the provision of the public good (labor quality), and the higher labor quality will increase firms' profits and employment. Shorter workweek regulations may therefore increase the firms' profits as well as the workers' employment and bring about a Pareto improvement.