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Since 1938 the U.S. Fair Labor Standards Act (FLSA) has required that most wage earners be paid one-and-a-half times their regular hourly pay rate for weekly hours worked above forty. This rate is comparatively high. Whereas South Korea and most Canadian provinces also require a 50 percent overtime premium, France, Germany, and Italy require a smaller 25 percent, collective bargaining sets overtime premiums in the United Kingdom, and New Zealand has no overtime regulation. Countries’ overtime regulations also differ in other aspects, such as the standard weekly hours beyond which the overtime premium applies, the types of jobs exempt from overtime regulations, and whether the regulation stipulates maximum weekly hours. An increasing number of countries allow employers to average work hours over the year rather than the week, greatly decreasing overtime payments.
The 1938 FLSA described its rationale as “the maintenance of the minimum standard of living necessary for health, efficiency and general well-being.” It gained union support because it made union labor more competitive. However, an additional major motivation behind overtime regulations, both during the Great Depression of the 1930s and the high unemployment of Europe in the 1980s and 1990s, is to increase employment.
Whether overtime regulation indeed has a salutary impact on employment is ambiguous even in the short run. An overtime premium will immediately increase the marginal cost of additional hours per week, thus decreasing the weekly hours of those previously working more than forty hours, decreasing national work hours, and creating many jobs of exactly standard hours (e.g., forty). Whether this also increases employment depends on the substitutability between labor and capital and between different types of labor, scale effects, and on other labor regulations and institutions.
Once contracts can be renegotiated, however, economic theory suggests that an overtime premium can easily be undone by an implicit contract reducing the straight-time wage rate until workers get the same weekly pay and work the same hours as before the regulation. Consequently employment would not change. This does not apply to minimum or near-minimum wage jobs, because straight-time pay rates cannot fall sufficiently to offset the premium.
The best empirical work studies the impact of new or tightened overtime regulations. Average hours decline for those earning at or near the minimum wage or when straight-time wages are not allowed to fall for other regulatory or institutional reasons. Similarly the FLSA permanently decreased overtime hours (over forty) and increased the number of people working exactly forty hours, perhaps because of minimum wage jobs. Extensions of U.S. overtime regulations to new groups of more highly paid workers have not significantly affected weekly hours, corroborating theoretical predictions.
Studies of decreases in standard time in Europe generally find that standard time and average weekly hours move together. These studies, however, do not isolate exogenous changes and therefore should not be used to impute causality. The employment effects of lower standard hours or otherwise tighter overtime legislation in European, U.S., and Japanese labor markets have typically been found to be zero or negative, although these studies are subject to the same criticisms regarding causality.
Bibliography:
- Hart, Robert A. 2004. The Economics of Overtime Working. Cambridge, U.K.: Cambridge University Press.
- Trejo, Stephen J. 2003. Does the Statutory Overtime Premium Discourage Long Workweeks? Industrial and Labor Relations Review 56 (3): 530–551.
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