Work Hours Regulation in a Search Economy with Adverse Selection

Two arguments for introducing a maximum work hours regulation are to enhance workers welfare by limiting excessive hours of work and to increase employment through work-spreading. We analyze the effects of this regulation in a labor market where adverse selection is an issue. Our results suggest that this policy would in fact reduce unemployment and worked hours, but it would also reduce the welfare of affected workers and aggregate welfare. This happens because in the new equilibrium wages are reduced and entry by firms is excessive. We obtain our results in a two-type competitive search model with adverse selection à la Guerrieri et al. (2010).