Best Student Paper Midwest Macro Spring 2024

Legal regulations of hours have become increasingly common, yet less is known about how workers’ earnings and hours are set in employment contracts. In this paper, I document in the SIPP that both hourly and non-hourly workers frequently report changes in hours that are persistent, but non-hourly workers’ elasticity of earnings with respect to hours is significantly less than one. To understand these patterns, I develop and estimate a frictional labor market model with implicit contracts motivated by risk-sharing and constrained by limited commitment. Although the model has no explicit hourly and non-hourly contracts, implicit contracts generate a larger earnings elasticity for low-income workers and when turnover is higher as in the data. Restricting hours of work within contracts leads to declines in workers’ output and welfare. This suggests policymakers should yield caution when restricting hours for high income and long-tenure workers who benefit the most from implicit contracts.