Working time regulation in a search economy with worker moral hazard

This paper analyzes the consequences of a working time reduction within an integrated shirking-matching model. Under "laissez faire", workers and employers bargain over wages and working hours. When unemployment is high, the no-shirking condition is binding and the number of working hours is lower than the level that would be negotiated in the absence of unobservable shirking, In this case, a work-sharing policy increases aggregate employment. At the opposite, for low unemployment countries. the no-shirking condition does not bind and a working time regulation always worsens the labour market situation. (C) 2002 Elsevier Science B.V. All rights reserved.