The California Overtime Experiment: Labor Demand and the Impact of Overtime Regulation on Hours of Work

In 1998, California changed its regulation of working hours from daily overtime (required overtime for hours above eight per day) to weekly overtime (required overtime for hours above forty per week). We analyze the effects of this change in overtime law on hours of work using a neo-classical model of labor demand and overtime regulation. According to this model, for workers ‘at the kink’ where overtime regulation is binding relaxing overtime regulation—as California did in 1998—should increase hours while for workers ‘above the kink’ it should decrease hours. An empirical analysis of the effect of the 1998 change in California’s overtime rules from daily to weekly overtime yields small or zero effects on average. However, when the effects are allowed to differ by type of worker as theory suggests we find larger effects—which tend to cancel each other out on average—in the same directions predicted by theory. Our estimates suggest that the hours effect of switching from a daily to a weekly overtime rule is equivalent to the hours effect one might expect from increasing the standard workweek by 0.6 hours. Relative to weekly overtime, daily overtime is regressive, raising the number of work hours of high-wage workers at the cost of reduced work hours for low-wage workers. † We thank Jed DeVaro, Brian Jacob, Duncan Thomas and seminar participants at Wisconsin and RAND/UCLA for helpful comments and discussions. This project was partially supported by the RAND Institute for Civil Justice. ‡ Assistant Professor, Harris Graduate School of Public Policy Studies, University of Chicago, 1155 East 60 St., Chicago, IL, 60637, [email protected] * Economist, RAND Corporation, Santa Monica, CA, 90407, [email protected] ** Professor, Department of Economics and Senior Fellow, Hoover Institution, Stanford University, Stanford, CA 94305