Is Variation in Hours of Work Driven by Supply or Demand? Evidence from Finnish Manufacturing Industries

Abstract

This paper uses panel data from 1989 to 1995 on blue-collar workers in Finnish manufacturing industries and their establishments to assess the extent to which hours of work are affected by individual or establishment characteristics – observed as well as unobserved. We argue that the recent research on hours of work has focused almost exclusively on the supply of labor, but that insights into the extent to which hours variation is driven not by supply but by demand will affect the likelihood that supply-side policies will succeed to overcome the high European unemployment trap. Our estimates show that establishment level variation is almost as important as that on the individual level in the total variation of hours. This suggests that at least part of the variation of hours is driven by demand.