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Wage-Hours Contracts, Overtime Working and Premium Pay

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Author Info
Hart, Robert A.
Ma, Yue

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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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File URL: http://hdl.handle.net/1893/501
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Paper provided by University of Stirling, Department of Economics in its series Stirling Economics Discussion Papers with number 2008-04.

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Date of creation: Oct 2008
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Handle: RePEc:stl:stledp:2008-04

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Postal: Department of Economics, Stirling, Stirling, Scotland FK9 4LA
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Web page: http://www.econ.stir.ac.uk/
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Related research
Keywords: wage-hours contracts; overtime; premium pay; specific human capital; asymmetric information;

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  1. 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, ILR School, Cornell University, vol. 56(3), pages 470-480, April. [Downloadable!] (restricted)
  2. Robert E. Hall & Edward P. Lazear, 1984. "The Excess Sensitivity of Layoffs and Quits to Demand," NBER Working Papers 0864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  5. Malcomson, James M., 1999. "Individual employment contracts," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 35, pages 2291-2372 Elsevier. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
  7. Lorne Carmichael, 1981. "Firm-Specific Human Capital and Promotion Ladders," Working Papers 452, Queen's University, Department of Economics.
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  8. 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. [Downloadable!] (restricted)
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