Can Overtime Premium Flexibility Promote Employment? Firm- and Worker-Level Evidence from a Labour Law Reform.- Pedro S. Martins

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  • Last update: 17 November 2017
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  • Author: Pedro S. Martins


In 2012, in the midst of a recession, a labour law reform in Portugal allowed rms to
reduce the overtime premium paid to their workers by 50% or more. Until then, overtime
premiums were set by law at a relatively high level and could not be cut unilaterally. We
analyse matched employer-employee panel data, including worker-level base and overtime
hours and pay, to shed light on the e ects of the resulting greater exibility in overtime
pay setting. We nd that half of the rms using overtime in 2011 did reduce their overtime
premiums in a manner consistent with the reform, in particular those rms making greater
use of overtime and paying higher premiums. Moreover, using di erence-in-di erences
matching and a long list of covariates, we nd that those rms that cut overtime premiums
exhibit signi cant relative increases in overtime usage, employment and sales following
the reform. Overall, our results highlight the important but not exclusive role of legal
restrictions behind downward nominal pay rigidity. Our ndings also suggest a signi cant
potential of overtime pay exibility to promote employment, even during a downturn.

Keywords: Working time, wage rigidity, employment resilience, labour reforms