Overtime Work as a Signaling Device

This paper adds to the various reasons for a worker’s supply of overtime hours by focusing on forward-looking labor supply, and provides an explanation for the empirically proven relationship between overtime and positive future outcomes. We suggest an internal signaling model, in which a worker signals his value to the employer by supplying unpaid overtime. The possible benefits from signaling by means of longer hours are promotion and job retention. We analyze whether overtime, and in particular unpaid overtime, can be an effective signaling device for a higher value, and derive the conditions for a separating and a pooling equilibrium. In the empirical part of the analysis, we examine whether overtime has in fact a signaling component. Variations in collectively bargained hours between industries are exploited, as they imply different overtime thresholds for workers with the same number of actual hours. Using data from the German Socio-Economic Panel Study (SOEP) for the years 1993 to 2004, support is found for the signaling hypothesis for West German workers, whereas negative signaling was found to prevail in East Germany.