Hours of Work: Moving Beyond Gridlock

 . . . even AFL-CIO officials concede what employers have long since held: It's cheaper to pay overtime rather than hire additional employees with the heavy fringe costs that go with each worker.

Business Week, January 26, 1963
Up to now, this essay has discussed the overtime premium and the factors that diminish its effectiveness as a policy tool for limiting work time. It's bad enough that the limitation of the work time has been bypassed by a loophole and that even the fee for using that loophole has been waived by yet another loophole. But there is yet a further irony: given current structures of compensation, it is often cheaper for employers to increase the hours of work above the legal maximum than it is to reduce work time the same number of hours below that maximum. In keeping with the definition of the overtime premium as a tax, it is appropriate to call the excess cost of reduced work time an undertime tax.

For example, if 17 percent of total labour costs for a 40 hour week are fixed, it is more expensive to reduce work time by eight hours a week than it would be to increase work time by the same number of hours (Chart 4).

Chart 4

As the fixed labour costs rise to the 18.5 percent range, it becomes more expensive to reduce the work week by four hours a week than to increase it by the same number of hours (Chart 5).

Chart 5

And at 20 percent fixed costs, any reduction in work time is more expensive than would be the corresponding increase in work time (Chart 6).

Chart 6

To make matters worse, the choice faced by employers would typically be between reducing work time by a greater number of hours and hiring more workers or increasing the length of the workweek by a lesser number of hours. For example, starting from a 40 hour week in which 20 percent of labour costs are fixed, a reduction of the work week to 36 hours adds 2 percent to the cost of labour, but an increase to 42 hours would add only 1 percent.

Let's review the logic of the argument so far: the overtime premium, while permitting the exceptional use of overtime, was intended to discourage the regular use of overtime. But, the offsetting effect of fixed labour costs undermined the premium as a disincentive for the regular use of overtime. As those fixed labour costs rose above a certain threshold, they became a barrier to the reduction of work time. Because the cost of reducing work time has become greater than the cost of scheduling overtime, adjustments to work time are now more likely to result in overtime than in shorter work time. Not only is the overtime premium ineffective in discouraging regular overtime, it is now producing an effect opposite to its intent.