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 neoclassical model of labor demand and overtime regulation. According to this model, relaxing overtime regulation should increase hours per worker in firms that choose hours ‘at the kink’ where overtime regulation is binding while it should decrease hours per worker in firms that already choose overtime. An empirical analysis of the effect of the 1998 change in California’s overtime rules from daily to weekly overtime yields negligible effects on average. However, when the effects are allowed to differ by type of firm as theory suggests we find larger effects—which tend to negate each other 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.