Compensating Wage Differentials for Mandatory Overtime

Abstract

Our paper estimates the extent to which employees are compensated for an unfavorable job characteristic, being required to accept mandatory assignment of overtime, by receiving higher straight-time wages. Our estimating equations are derived from a model in which wage rates and the existence of mandatory assignment of overtime are jointly determined in the market by the interaction of employee and employer preferences. While - on average, we do not observe the existence of a compensating wage differential for mandatory overtime, we do observe the existence of such differentials for unionized workers and workers with only a few years experience at a firm. Given any estimated compensating wage differential for an unfavorable working condition, one must decide whether its magnitude is sufficiently large to allow one to conclude that the differential fully compensates workers for the disutility of being subject to the unfavorable working condition. We develop and illustrate a methodology that can be used to answer this question, at least for the case of mandatory overtime provisions and other rules that restrict employees' choice of hours.