Why Do Firms Pay an Overtime Premium?
AbstractThis paper develops a two-period specific human capital model in which the bargaining parties seek to achieve optimal wage-hours contracts in the face of asymmetrically held information. With a single wage rate, we show that the problem of inefficient separations is so severe that, effectively, no specific training would take place. A wage premium on weekly overtime hours serves to reduce the effects of asymmetric information although it does not completely eliminate inefficiency. For those weekly hours for which a premium is paid, worker compensation exceeds the value of marginal product. There is an optimal automatic compensatory differential rule represented by an inverse relationship between the contractual wage and the overtime premium. Implications of imposing mandatory rules for premium pay and hours of work, as practiced in the United States, are assessed. The model is found to offer insights into important earlier finding in the literature.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 163.
Length: 38 pages
Date of creation: Jun 2000
Date of revision:
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Find related papers by JEL classification:
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
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