The Impact of Overtime Limits on Firms and Workers: Evidence from Japan's Work Style Reform

How do limits on working hours affect firms, workers, and households? We study Japan's 2018 Work Style Reform (WSR), which introduced the country's first binding cap on overtime hours. Using establishment payroll data and worker surveys in a difference-in-differences design, we show that the reform reduced monthly overtime by 5 hours (25%) and compressed its distribution within firms. Total earnings fell by 1.4% due to lower overtime pay, while employment responses remained limited, contrary to the predictions of conventional work-sharing models of overtime regulation. The reform narrowed overtime gaps between standard and nonstandard jobs and reduced gender differences in long working hours. Consistent with a reduced role for extreme overtime as a screening device in career-track jobs, women gained greater access to standard employment and mid-level managerial positions, but not to top management. Female workers also experienced differential improvements in life and leisure satisfaction. Finally, we find suggestive evidence of positive cross-spousal spillovers on women's well-being.

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