Forecasting the Effects of the August 23 rd Fair Labor Standards Act Overtime Changes

On August 23rd, 2004 the Department of Labor revised Fair Labor Standards Act (FLSA) overtime coverage rules. Under the FLSA, those who are covered receive time-and-a-half pay for all hours worked above forty hours while those who are exempt do not receive mandatory overtime pay. By altering the so-called “white-collar exemptions” to the FLSA, the Department of Labor ensured that some workers would gain coverage while others would lose coverage. I focus on coverage gainers, white-collar workers whose weekly salaries are between $250 and $455 per week. Conveniently, in 1999 the state of California covered a nearly identical group of whitecollar workers with salaries between $250 and $460 per week while most other states, following old FLSA rules, did not. Using difference-in-difference estimation, I exploit this cross-sectional variation to analyze the effect of California’s more extensive coverage on the decision to work overtime and the number of overtime hours worked. Probit analysis suggests that overtime coverage reduces the probability of working overtime by over eighteen percent. This conforms to the predictions of a neo-classical labor demand model of overtime. However, Tobit analysis of overtime hours suggests coverage does not significantly alter overtime behavior directly. This is consistent with an alternative contractual model of overtime where workers and firms adjust hourly wages to negate the effects of overtime regulations. But Tobit analysis also suggests indirect effects, firm substitution for hours of relatively less expensive workers. This result is consistent with a modified version of the neo-classical labor demand model with distinct labor inputs. Overall, the coverage extension is found to be regressive, redistributing income from lower to higher earning workers. *I would like to thank Tom MaCurdy and Jay Bhattacharya for advising me and for working with me throughout my Stanford career. I would also like to thank Sri Nagavarapu for mentoring me on this project.