This paper estimates the employment, income, and reclassification effects of expanding overtime coverage for salaried workers. In the United States, employers are required to pay salaried employees who earn less than the “overtime exemption threshold” an additional one-and-a-half times their implied wage for each hour worked above 40 within a week. I evaluate the impact of 18 state and federal increases in this threshold between 2014 and 2020 using detailed administrative payroll data that covers over 17 million workers per month. Contrary to the two prevailing theories of overtime, I find both negative employment and positive income effects.
First, while the labor demand model predicts that expanding overtime coverage would raise employment as firms substitute workers for hours, I estimate that 4 jobs are lost and 10 are reclassified from salaried to hourly for every one hundred workers who would gain coverage under a new threshold. Second, inconsistent with the predictions of the compensating differentials model of overtime, I find no evidence that firms reduced workers' base pay to offset the increase in overtime pay. Instead, workers directly affected by a rule change experienced a 1.2% increase in their total income due to both a rise in overtime pay and a bunching effect whereby employers raised workers' salaries to the new threshold to keep them exempt. I show that these labor market effects can be explained in a job search and bargaining model whereby overtime eligibility imposes a fixed cost per worker covered.
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