Stanford News

4/2/97

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More overtime, higher earnings with elimination of California's daily overtime law, study finds

California workers will enjoy more overtime and higher earnings if the state eliminates its daily overtime law, according to a study released Monday, March 31.

Both workers and employers will gain from the proposal currently under consideration by the California Industrial Welfare Commission to change its overtime rules to the current federal standard, the study says. The federal standard requires overtime pay after 40 hours in a week, while California currently is one of a few states requiring overtime wages be paid after an employee works 8 hours in a day, as well as after 40 hours in a week.

The authors of the study are Thomas MaCurdy, senior fellow at the Hoover Institution and a professor of economics at Stanford; Jayanta Bhattacharya, a Stanford doctoral student in economics; and Thomas DeLeire, assistant professor at the Harris School of Public Policy at the University of Chicago.

"Contrary to the position held by advocates of the status quo, our statistical comparison indicates that a switch to a 40-hour rule is likely to lead to more overtime work in California," MaCurdy said. "This will induce both a larger fraction of covered individuals working overtime and a greater number of hours compensated at the time-and-a-half rate per overtime worker."

The three found that practically all overtime earned in California under the 8-hour-day rule also would have been earned under a 40-hour- week rule, implying only minor reductions in earnings. Although only about 10 percent of covered workers report any overtime at all in a typical week, and for them the largest loss would be less than 10 percent in overtime hours, labor markets are not favorable to the abandonment of the daily overtime rule. The loss would amount to an annual pay reduction in today's dollars of about $175 million totaled across all workers, or 40 cents per week per covered worker. Ninety percent of covered workers would be unaffected economically, however, except through increased scheduling flexibility. "Even in the worst case, these figures indicate small adverse effects," MaCurdy said.

The economists don't expect the worst case to apply, however, and say that the evidence indicates that changing to a 40-hour-week rule would raise total pay for the state's workers. Relaxing overtime rules will allow firms to abandon rigid and inefficient daily work schedules designed to avoid overtime, leading to greater productivity, which can benefit both workers and employers. By comparing the overtime experiences of California workers with those of workers living in other states, the economists concluded that eliminating the 8-hour-day rule will:

MaCurdy, Bhattacharya and DeLeire used the most recently available data from the U.S. Census on overtime in California ­ the 1985 and 1991 Current Population Surveys ­ along with 1995 data to place the findings into the current context.

They compared the overtime experiences of California workers with those of workers in states with a 40-hour work week. All states other than California, Nevada and Alaska impose the federal 40-hour-per-week overtime rule.

Beyond earnings, the switch from an 8-hour day to a 40-hour week will permit added flexibility in schedules for California workers, the economists say. This added flexibility, they argue, will benefit two-wage earner families and others who need to balance the twin responsibilities of work and family. Census data reveal that California's covered workers endure less flexible work schedules than counterparts living in states operating under the 40-hour rule.

The increase in pay anticipated from the switch to a 40-hour week will come from more people working overtime, and an expansion in the number of hours of overtime they work. Schedules will become more flexible, offering benefits even to workers who never receive overtime, according to the authors.

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By Michele Horaney