Hours of Work: Moving Beyond Gridlock

The overtime premium ("time and a half") offers a striking example of good intentions gone awry. Few would doubt that the intention of the overtime premium is to discourage longer hours of work, but to do so in a way that gives employers some flexibility to meet emergencies and peak periods of demand. Although some observers question the effectiveness of the premium in curbing overtime, I have yet to find one who would state that the overtime premium actually encourages the use of overtime and blocks the way to shorter hours of work. So I'll say it now:


How so?

My argument takes its cue from Ronald G. Ehrenberg's 1971 study Fringe Benefits and Overtime Behavior. In that study, Ehrenberg showed that high fixed labour costs (such as fringe benefits) weaken the deterrence of the overtime premium and lead to more frequent use of overtime. I'd push the argument one step further to say that overtime premiums are probably a major cause of the steep and steady increase in employer paid fringe benefits that occurred in the three decades after World War II. In other words, I'd say the offset was deliberate.

It isn't possible to be inside the heads of corporate managers and union negotiators from four or five decades ago, but it is possible to do a few simple calculations and reconstruct the cost options that they might have had before them. A simple story can help to illustrate.

Let's now go behind the scenes of an historic collective bargaining session between the United Sisterhood of Tooth Fairies and Allied Workers (USTFAW) and Mammoth Dental Finance Corp. The year is 1947 -- and YOU are there...

The demand for tooth fairy service has always been unpredictable. Some nights, it takes a fairy 10 or 12 hours to visit all the children who have lost teeth that day. Traditionally, Mammoth has paid it's fairies by the hour and has provided no benefits or time off with pay -- "an hour's work for an hour's pay" was the founder's slogan. Starting this year, however, Mammoth is feeling the impact of a nine-year old law requiring it to pay its fairies time and a half for work over 8 hours in a day (night) or 40 in a week.

The rule has caused Mammoth's accountant, Peter Pencil, some consternation. Not only has it increased the company's average cost per hour actually worked, it has made that cost less predictable. Now, whenever there's a surge in demand, there's also a surge in labour costs. Pencil is not pleased.

But Pencil knows his fractions, and he's determined to find a way around the time and a half dilemma. A careful reading of the overtime law gives him an idea. "Let's see, it says here 'the overtime rate shall be equivalent to time and one half times the employee's regular rate of pay'. Hmmm, doesn't say anything about 'fringe benefits'. That's it! If we pay our fairies two-thirds of their regular wages in wages and one third in 'fringe benefits', then we'll only have to pay them straight time for overtime [two-thirds times one and one half equals one]! But wait a minute -- these fairies aren't going to be too happy about a one third pay cut. We'd better introduce this thing gradually."

Armed with Pencil's cost calculations, the company negotiators enter into collective bargaining with USTFAW. The fairies are pulling for a 10% raise -- well within the company's ability to pay. But management throws a curve. "O.K., we'll give you the 10%. But our cost calculations show that we'd be more competitive if we pay half of that as an increase in wages and the other half as a fringe benefit -- say a dental plan. You'll actually get more than you bargained for in value, because the fringe benefit is tax exempt."

The union negotiators look at each other in bewilderment. They aren't used to the company giving in on the first round. "How could this be so easy? We'd better do some calculations." They sharpen their pencils and adjourn to a back room. A few minutes later, they return shrugging their shoulders, shaking their heads and extending their hands to company negotiators.

A few hours later, the negotiating team presents the tentative deal to the membership for ratification. "The company negotiators were stubborn, but we hung in there and got a 'package' that gives us the full percentage increase we asked for. There's even a few bonuses -- as a group, our new dental plan will cost us less than if we each went out and bought dental insurance on the market. And we won't have to pay taxes on the money the company pays for the dental plan." Being only too aware of the rising cost of dental care, the fairies eagerly approve the new contract.

A new era of labour-management relations had dawned.

Fast forward to the 1990s... Benefits now account for around 30% of Mammoth's labor costs. The overtime premium has, in effect, been wiped out by the cumulative effect of the fixed-cost benefits. A Mammoth week of 46 hours costs the company about the same per hour worked as a standard 40 hour week. Fairies average three to four hours a week of overtime. Fifty and sixty hour weeks are not unheard of.

But tooth fairy demographics have changed, too. More fairies with young children are in the work force. Two-earner fairy households are common. The union is now seeking more family-friendly work time schedules -- both for the sake of its own membership and to help relieve the chronic unemployment that is widespread in Fairyland.

Peter Pencil's successor, Sandra P. Spreadsheet has taken the union demands for work sharing and job sharing back to her office for closer examination. "Hmmm," Spreadsheet calculates,"even if workers give up one hour's pay for each hour less they work, the average cost per hour goes up. This is out of the question. We won't be able to compete in today's global markets. Nope. No way. Never."

Armed with Spreadsheet's figures, management tosses the work sharing proposals in the waste paper basket. "Look," they tell the union negotiators, "we've got to be working more hours in today's competitive climate, not less -- our fixed costs are through the roof. Your members are lucky to have a job with good pay and benefits. Don't bother us with frivolous demands. This worksharing stuff is utopian, pie-in-the-sky, airy-fairy wishful thinking. Get real."

The union team can see they're getting nowhere with the work sharing proposal. "Maybe, we could get the government to change the laws," suggests the union's chief economist. "Raise the overtime premium from time and a half to double time. Make the overtime premium payable after 32 hours, instead of 40."

Everyone nods -- it's unclear as to whether in agreement or off to sleep.

"Yeah, sure," one small, skeptical voice breaks in, "You guys still believe in the 'overtime premium'? I suppose you believe in the tooth fairy, too!"

(Copyright 1997. Permission granted to circulate this article intact.)