Time to Innovate

We leverage Korea’s 52-hour workweek law and a regression discontinuity design to examine how reduced working hours affect corporate innovation. Effective July 2018, the law leads to an immediate fall in working hours and a subsequent rise in innovation output by the end of 2019, only in light manufacturing, a sector heavily reliant on employee-driven innovation. This effect is attributed to suboptimal pre-law time allocation, as evidenced by the absence of significant changes in output, labor inputs, and capital inputs. The impact is more pronounced in establishments where innovation incentives complement increased non-labor time and is weaker where other forms of slack act as substitutes. The pre-law suboptimality is explained by structural inertia (proxied by a higher average employee age) and not by agency conflicts.