In Econ 244: Gender and the Economy, we have been learning about two particular effects that influence an individual’s decision of how many hours to dedicate to market work: the substitution effect and the income effect. Now, I’m not just bringing this up to tell you about a (super interesting) class that I’m taking, but also because of the recent proposal to increase the threshold salary under which individuals are eligible for overtime pay. Currently, individuals earning $23,700 or less annually are eligible for these additional wages, however the new proposal by the Labor Department would increase that maximum threshold to a salary of $35,000. The controversy over this, however, is that the proposed increase would cover far fewer people than the Obama initiative that was discarded by a Texas judge.
Contention aside, if the increased threshold is passed under the new initiative, it would effectively expand overtime eligibility to about one million additional workers, effectively increasing their potential earnings. According to the labor force participation model (for lack of a more succinct name), the substitution effect dominates the income effect. However, let’s examine what might happen to an individual impacted by this proposed expansion of wages, with regard to each effect.
The substitution effect says that when wages increase, the opportunity cost of staying out of the market (or spending more hours outside of market work) increases, and thus induces an individual to increase their time in the paid labor market. With overtime pay available to more people, there is a potential to see an increase in time spent in the labor market as well.
Conversely, the income effects says that when wages increase, demand for all goods, including nonmarket (or leisure) time, increases, and thus an individual is induced to decrease the number of hours they spend in the labor market.
Why does this matter? Given that women are more likely to work part time than men (Blau & Winkler, 101), women are lower earners (Blau & Winkler, 172), and that the substitution effect is likely to dominate the income effect, there may be an increase in the number of hours worked by women so as to ascertain the advantages of this overtime pay because they fall under the new threshold in larger proportion than men. Thus, there may be a noticeable increase in the hours women spend in the labor force for that income bracket of women.
Blau, D. F., & Winkler, E. A. (2018). The economics of women, men, and work. New York: Oxford University Press