Proponents claim that a statutory overtime premium, by raising the relative cost of overtime, may encourage firms to substitute employment for overtime hours. I argue that there will be no real effects if firms reduce straight-time wages so as to offer the same package of weekly compensation and hours of work that was acceptable initially. Empirical analysis suggests that wage differentials do arise to mitigate the purely demand-driven effects predicted by previous models, but these differentials are not large enough to neutralize overtime pay regulation completely.

Proponents claim that a statutory overtime premium, by raising the relative cost of overtime, may encourage firms to substitute employment for overtime hours. The author argues that there will be no real effects if firms reduce straight-time wages so as to offer the same package of weekly compensation and hours of work that was acceptable initially. Empirical analysis suggests that wage differentials do arise to mitigate the purely demand-driven effects predicted by previous models, but these differentials are not large enough to neutralize overtime pay regulation completely.