In this paper, a model of optimal employment contracting describes differences across countries in firing restrictions and short-time compensation systems for workers forced to work shorter hours to avoid layoff. The model predicts that the existence of a short-time compensation (STC) system will generate major fluctuations in working hours only if the STC system is more generous than the traditional unemployment insurance system. A test performed for 10 OECD countries shows that in countries with generous STC systems, the speed of adjustment of total hours worked is higher than in the United States, despite a much slower adjustment in the number of workers employed. On the other hand, in countries with less generous STC systems, hours adjustments are far from compensating the slower employment adjustments.

In this paper, a model of optimal employment contracting describes differences across countries in firing restrictions and short-time compensation systems for workers forced to work shorter hours to avoid layoff. The model predicts that the existence of a short-time compensation (STC) system will generate major fluctuations in working hours only if the STC system is more generous than the traditional unemployment insurance system. A test performed for 10 OECD countries shows that in countries with generous STC systems, the speed of adjustment of total hours worked is higher than in the United States, despite a much slower adjustment in the number of workers employed. On the other hand, in countries with less generous STC systems, hours adjustments are far from compensating the slower employment adjustments.