Designing the optimal length of working time: a counterfactual policy analysis

Purpose – How many hours per week should workers in the USA and Germany spend at their paying jobs? The present paper aims to address this question by constructing policymakers' reaction functions capable of modelling the optimal length of working time as a function of the relevant labour market variables. Design/methodology/approach – The study is based on a counterfactual policy experiment. Given a policymaker's loss function and a structural model of the labour market alternative specifications of reaction functions are defined where the response coefficients indicate how policymakers should react to any news in the labour market in order to stabilise employment and wages. Findings – The results suggest that simple rules perform quite well and that the advantages obtained from adopting an optimal control‐based rule are not so great. Moreover, the analysis emphasises the success of the wage‐based rule and of the employment‐based rule in the USA and Germany, respectively. Research limitations/implications – The study is based on a counterfactual policy experiment, which perhaps limits its operational value. Practical implications – Labour market authorities might stabilise employment and wages by implementing policy rules. Originality/value – The paper proposes a policy rule to capture the dynamics of the weekly working hours. According to the rule in the paper the length of the workweek is an inverse function of the deviation between the actual and potential employment level.