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Wage-Hours Contracts, Overtime Working and Premium Pay

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Author Info

  • Hart, Robert A.

    ()
    (University of Stirling)

  • Ma, Yue

    ()
    (City University of Hong Kong)

Abstract

This paper offers a contract-based theory to explain the determination of standard hours, overtime hours and overtime premium pay. We expand on the wage contract literature that emphasises the role of firm-specific human capital and that explores problems of contract efficiency in the face of information asymmetries between the firm and the worker. We first explore a simple wage-hours contract without overtime and show that incorporating hours into the contract may itself produce efficiency gains. We then show how the introduction of overtime hours, remunerated at premium rates, can further improve contract efficiency. Our modelling outcomes in respect of the relationship between the overtime premium and the standard wage rate relate closely to earlier developments in hedonic wage theory. Throughout, we emphasise the intuitive reasoning behind the theory and we also supply relevant empirical evidence. Mathematical derivations are provided in an appendix.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3797.

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Length: 42 pages
Date of creation: Oct 2008
Date of revision:
Publication status: published in: Labour Economics, 2010, 17 (1), 170-179
Handle: RePEc:iza:izadps:dp3797

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Related research

Keywords: asymmetric information; specific human capital; premium pay; overtime; wage-hours contracts;

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References

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  1. Kinoshita, Tomio, 1987. "Working Hours and Hedonic Wages in the Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1262-77, December.
  2. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September.
  3. Hall, Robert E & Lazear, Edward P, 1984. "The Excess Sensitivity of Layoffs and Quits to Demand," Journal of Labor Economics, University of Chicago Press, vol. 2(2), pages 233-57, April.
  4. Trejo, Stephen J, 1991. "The Effects of Overtime Pay Regulation on Worker Compensation," American Economic Review, American Economic Association, vol. 81(4), pages 719-40, September.
  5. Hutchens, Robert M, 1989. "Seniority, Wages and Productivity: A Turbulent Decade," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 49-64, Fall.
  6. David N. F. Bell & Robert A. Hart, 2003. "Wages, hours, and overtime premia: Evidence from the British labor market," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 56(3), pages 470-480, April.
  7. Lorne Carmichael, 1981. "Firm-Specific Human Capital and Promotion Ladders," Working Papers 452, Queen's University, Department of Economics.
  8. Malcomson, J., 1998. "Individual employment contracts," Discussion Paper Series In Economics And Econometrics 9804, Economics Division, School of Social Sciences, University of Southampton.
  9. Masanori Hashimoto & Ben T. Yu, 1980. "Specific Capital, Employmemt Contracts, and Wage Rigidity," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 536-549, Autumn.
  10. Hart,Robert A., 2004. "The Economics of Overtime Working," Cambridge Books, Cambridge University Press, number 9780521801423.
  11. Hashimoto, Masanori, 1981. "Firm-Specific Human Capital as a Shared Investment," American Economic Review, American Economic Association, vol. 71(3), pages 475-82, June.
  12. Trejo, Stephen J, 1993. "Overtime Pay, Overtime Hours, and Labor Unions," Journal of Labor Economics, University of Chicago Press, vol. 11(2), pages 253-78, April.
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Cited by:
  1. Hart, Robert A & Ma, Yue, 2013. "Overtime Working and Contract Efficiency," Stirling Economics Discussion Papers 2013-07, University of Stirling, Division of Economics.
  2. Singer, Marcos & Obach, Juan José, 2013. "Listening to workers: The overtime versus hiring dilemma," Journal of Business Research, Elsevier, vol. 66(10), pages 1771-1779.
  3. Bell, David N.F. & Hart, Robert A., 2010. "Retire Later or Work Harder?," IZA Discussion Papers 4720, Institute for the Study of Labor (IZA).

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