In their paper, "Labor Supply Within the Firm," Battisti, Michaels, and Park examine how one's personal preferences for leisure are balanced by an incentive to coordinate with coworkers in determining working time. Recent literature indicates there are substantial fluctuations in working hours among the employed. In several European countries, variations in employees' working times were found to be as great as fluctuations in employment.1 In the U.S. manufacturing sector, per person working times at plants were also shown to be as variable as employment.2 In comparison, a number of earlier labor studies reported only small variability in the amount of time employees spent at work. Battisti, Michaels, and Park present a framework to explore this contradictory evidence in the literature.
A main principle in the economics of labor supply is that an individual's choice of working time reflects two broad considerations: the offered wage and the value one places on time outside of work. Thus, if workers can earn a higher bonus this year by supplying more effort, they are likely to do so. Conversely, workers may seek to scale back their hours if they want to commit more time to engagements outside of work, including caring for a dependent or managing an illness. Many influential economics papers have tried to understand workers' willingness to vary their working time — a concept known as the Frisch elasticity3 — by examining how working time responds to these kinds of "personal events." Battisti, Michaels, and Park broaden their study by examining not only employees' labor supply reactions to changes in earnings based on personal motives but also their working relationships with colleagues to help explain time spent at work.
The authors developed a model of working time, earnings, and employment demand using an employee-employer matched data set from the Northern Italian region of Veneto. The data span nearly two decades beginning in 1982, covering all private firms and all private sector employees during that time. Their analysis indicates that in a typical year about half of these Italian workers varied the number of days they worked, with the change in days normally ranging from 10 to 19 days. The average number of days worked was 244, roughly two-thirds of the days in a calendar year.
In the authors’ framework, workers are considered "complementary" if each worker does a specific job that (i) cannot be easily reassigned to another employee, and (ii) enables coworkers to more proficiently do their jobs. This description applies to many workplaces, from assembly plants to hospitals. These complementarities imply a strong incentive to coordinate working times because greater effort on the part of any one worker will achieve limited results if not coupled with additional effort from colleagues. Even as complementarities "nudge" workers toward coordinating schedules, managers still must contend with employees' varied personal ("idiosyncratic") preferences for working time. This variation in preferences reflects, broadly speaking, differences in how workers value their time outside of work. The authors show that workers will bargain for extra compensation for the time spent at work over what they would have chosen solely based on personal preferences. The authors used the data on the variability of both earnings and working time within specific firms to separate out the roles of complementarities and preferences.
The key insight from their analysis is that, if complementarities are strong within a firm, the variation in working times becomes compressed as workers make adjustments that account for the productive relationships with coworkers, regardless of personal preferences for working time. Meanwhile, the effect of changes in personal preferences is "squeezed" into earnings changes. The authors' framework implies that, by considering only workers' response to changes in their own motives for working, the willingness of workers to adjust their working time is substantially understated. The presence of complementarities means that these same workers are willing to adjust their effort considerably more if their coworkers also have a reason for increasing their effort. This might happen if, for instance, there is high demand for their employer's product.
To highlight the implications of their framework, the authors used their model to revisit an influential labor market "experiment" carried out in the U.S. Specifically, they simulated the implications of providing cash transfers to workers, much like the Negative Income Tax (NIT) randomized control trials from the 1960s and 1970s.4 In the literature, analyses of the NIT trials typically found very small working time responses, although these trials were limited in scale. Battisti, Michaels, and Park show that the working time of any given employee receiving a transfer changes far less when few of the employee's colleagues also receive a transfer. More precisely, they found that, if researchers infer the Frisch elasticity when only a few workers receive transfers, their estimates are biased down by more than 50 percent.
In conclusion, the paper by Battisti, Michaels, and Park shines a light on the role of worker complementarities and the "starring role" played by employers in shaping working hours. Their results help clarify contradictory findings in the literature on the degree of working time responsiveness among the employed (elasticity of labor supplied) by highlighting the role of complementarity among coworkers. The authors suggest that, by applying their framework, future research could revisit the working time responses to a variety of other economic shocks, such as housing price changes, which can have very uneven effects among a firm's home-owning workers.
1 G. Llosa, L. Ohanian, A. Raffo, and R. Rogerson, "Firing Costs and Labor Market Fluctuations: A Cross-Country Analysis," mimeo (2014).
2 R. Cooper, J. Haltiwanger, and J. Willis, "Dynamics of Labor Demand: Evidence from Plant-Level Observations and Aggregate Implications," Research in Economics, 69(1), (2015) p. 37-50.
3 Frisch elasticity, named after the economist Ragnar Frisch, measures the percentage change in working time associated with a percentage change in the wage level given a constant marginal utility of wealth. In other words, it measures the substitution effect associated with a wage change.
4 The NIT was a U.S. social science experiment to evaluate how grants to the poor affect their incentive to work.