Job creation entails some fixed costs, but existing jobs are subject to diminishing returns.
We characterize the equilibrium in the de-regulated economy in which large firms and individual workers freely negotiate wages and hours. Then, we consider the effects of restricting working time, while letting wages respond endogenously. Employment effects are very sensitive to the degree of separability and sustitutability between consumption and leisure. Furthermore, employment effects are never positive if either there are constant returns to labor or in the absence of fixed factors of production. Unemployment insurance has the standard effect of reducing employment, but also helps workers to get a suitable job.