The Fair Labor Standards Act, enacted in 1938, requires that firms pay \"double

Question

The Fair Labor Standards Act, enacted in 1938, requires that firms pay "double time", which is 200% of the regular wage rate, for overtime work. This question asks you to consider some of the incentive effects of overtime pay.

a) When overitme pay was first required, some firms tried to avoid the extra labor cost by reducing workers' base wage. Consider a woker who is working 10 hours a day and making $10/hour before the law went into effect. Assume that his employer cuts his base hourly wage so that at 10 hours of work per day, total compensation does not change after the law goes into effect, i.e., it is still $100. What is the new base hourly wage in this scenario? (Feel free to express the new wage as a fraction, but be sure to show your work.)

b) When faced with the budget constraint you derived in part (a), will a worker who previously worked for 10 hours per day for $10 per hour (with no overtime pay) now want to work more or fewer than 10 hours per day (with overtime pay, but with the new base hourly wage you derived in part (a))? Organize your discussion around income and substitution effects.

Explanation / Answer

a) The wage rate for overtime is $20 per hour. Let a be the base rate after the policy is enacted. We know that 10 hour of work still fetched $100; therefore,

8a + 20(2) = 100
a = $7.50

b)

Refer to the figure below.

Before the new policy, the budget constraint is DC. After the policy, the budget constraint is AC with a kink at point B. There is no income effect of the policy, as the worker still earns $100 at his original position. But yes, there is substitution effect in favor of working more. Therefore, the worker will work more than 10 hours after the new wage policy is enacted.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.