Why Do Firms Pay an Overtime Premium?
37 Pages Posted: 10 Nov 2003
Date Written: November 2000
Abstract
We develop a rationale for the payment by firms of a wage premium on marginal, or overtime, weekly hours. We examine wage-hours contracts within the framework of a two-period specific human capital model with asymmetric information. The wage premium serves to achieve contract efficiency. 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 between straight-time wages and the premium, and this provides new theoretical insights into recent empirical work in this area. Implications of imposing mandatory rules for premium pay and hours of work are also assessed.
Keywords: Overtime premium, human capital, asymmetric information, mandatory overtime rules
JEL Classification: J41, J33
Suggested Citation: Suggested Citation
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