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Wage-Hours Contracts, Overtime Working and Premium Pay

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  • Hart, Robert A
  • Ma, Yue

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.

Suggested Citation

  • Hart, Robert A & Ma, Yue, 2008. "Wage-Hours Contracts, Overtime Working and Premium Pay," Stirling Economics Discussion Papers 2008-04, University of Stirling, Division of Economics.
    • Handle: RePEc:stl:stledp:2008-04
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    File URL: http://hdl.handle.net/1893/501
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    References listed on IDEAS

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    4. Hart,Robert A., 2004. "The Economics of Overtime Working," Cambridge Books, Cambridge University Press, number 9780521801423, September.
    5. Hashimoto, Masanori, 1981. "Firm-Specific Human Capital as a Shared Investment," American Economic Review, American Economic Association, vol. 71(3), pages 475-482, June.
    6. David N. F. Bell & Robert A. Hart, 2003. "Wages, Hours, and Overtime Premia: Evidence from the British Labor Market," ILR Review, Cornell University, ILR School, vol. 56(3), pages 470-480, April.
    7. Trejo, Stephen J, 1991. "The Effects of Overtime Pay Regulation on Worker Compensation," American Economic Review, American Economic Association, vol. 81(4), pages 719-740, September.
    8. Kinoshita, Tomio, 1987. "Working Hours and Hedonic Wages in the Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1262-1277, December.
    9. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
    10. F. P. R. Brechling, 1965. "The Relationship between Output and Employment in British Manufacturing Industries," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(3), pages 187-216.
    11. Shulamit Kahn & Kevin Lang, 1992. "Constraints on the Choice of Work Hours: Agency Versus Specific-Capital," Journal of Human Resources, University of Wisconsin Press, vol. 27(4), pages 661-678.
    12. 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.
    13. Trejo, Stephen J, 1993. "Overtime Pay, Overtime Hours, and Labor Unions," Journal of Labor Economics, University of Chicago Press, vol. 11(2), pages 253-278, April.
    14. 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.
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    Cited by:

    1. Giorgio d'Agostino & Michele Raitano & Margherita Scarlato, 2022. "Job mobility and heterogeneous returns to apprenticeship training in Italy," British Journal of Industrial Relations, London School of Economics, vol. 60(2), pages 391-423, June.
    2. Angelina Keil & Thomas Leoni & Konrad Wolfgang Kallus & Kerstin Gaisbachgrabner, 2011. "Folgekosten langer Arbeitszeiten. Kommentierter Literaturüberblick," WIFO Studies, WIFO, number 42411.
    3. Bell, David N.F. & Hart, Robert A., 2010. "Retire Later or Work Harder?," IZA Discussion Papers 4720, Institute of Labor Economics (IZA).
    4. Hart, Robert A. & Ma, Yue, 2013. "Overtime Working and Contract Efficiency," IZA Discussion Papers 7560, Institute of Labor Economics (IZA).
    5. 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.
    6. Bell, David N.F. & Hart, Robert A., 2019. "The Decline of Overtime Working in Britain," IZA Discussion Papers 12651, Institute of Labor Economics (IZA).
    7. David N. F. Bell & Robert A. Hart, 2023. "The decline of paid overtime working in Britain," British Journal of Industrial Relations, London School of Economics, vol. 61(2), pages 235-258, June.

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    More about this item

    Keywords

    asymmetric information; specific human capital; premium pay; overtime; wage-hours contracts;
    All these keywords.

    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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