Longer Overtime Hours: The Effect of the Rise in Benefit Costs

CRS Report for Congress
Longer Overtime Hours:
The Effect of the Rise in Benefit Costs
Updated September 6, 2000
Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

Longer Overtime Hours: The Effect of the Rise in Benefit
Anecdotal accounts of the increased encroachment of regularly scheduled
overtime on employees’ family or social lives and the heightened use of overtime at
manufacturers who have not rehired all their employees let go during the 1990-1991
recession have suggested to some observers that it may have become cheaper for
firms to extend work hours than to hire additional employees. Between 1956 and
1963, manufacturing workers put in an average of 2.5 hours of overtime. In the next
29 years, overtime at factories lengthened less than 2 minutes per year on average to
3.4 hours a week. Between 1993 and 1999, in contrast, overtime hours expanded an
average of almost 13 minutes per year to 4.9 hours a week. Although millions of jobs
were created in nonmanufacturing industries during the 1990s, some contend that
more people would have been hired had a change not occurred in the employment-
hours calculation of firms.
All other things being equal, a firm makes its employment-hours calculation
based on the least cost combination of the number of workers and the number of
hours per worker. A factor thought to influence this optimal combination is the per-
employee (quasi-fixed) non-wage cost of labor: the higher these costs relative to total
labor costs or the higher these costs compared to the overtime wage rate, the more
likely firms are to substitute longer hours for new jobs. Per-employee costs, which
do not vary with the number of hours employees work, include employer spending
associated with employee hiring and firing (e.g., training and severance) and with
certain benefits (e.g., health insurance). As studies of the relationship between the use
of overtime hours and quasi-fixed non-wage labor costs have produced mixed results,
claims about the job-creating effectiveness of increasing the Fair Labor Standard Act’s
(FLSA) overtime premium should be viewed with caution.
The coincidence of more overtime and little factory job growth could prompt
proposals to raise the FLSA’s overtime premium or to shorten its standard workweek.
These measures might not create as many jobs as expected if firms substitute capital
for labor in the production process or if they pass the increase in labor costs on to
consumers through higher prices which could then prompt a decrease in product
demand and employment. The unemployment rate also might not fall as much as
anticipated if workers whose hours are curtailed moonlight to maintain earnings or if
the unemployed lack the skills needed for newly created jobs. Some could argue that
because a mismatch already exists between job openings and jobseekers at this point
in the business cycle, the government should take no action. Others might seek to
have mandated benefit costs curbed. Workers’ compensation is more a state than
federal program, and there are many factors besides state-set benefit levels and
eligibility rules that affect the cost of the program to employers. Social security,
because of its fairly high taxable wage ceiling, is largely a variable (per-hour) rather
than a fixed (per-employee) cost, which means cutting payroll taxes would likely favor
longer hours over more jobs. The low taxable wage base set by the government
makes its share of the unemployment insurance (UI) program largely a fixed cost for
firms, but much of UI’s financing is determined at the state level.

The Trend in Overtime Hours Worked................................1
Short-Run Explanations.......................................3
Long-Run Explanations.......................................3
Policy Implications..............................................6
Raising the Overtime Premium..................................7
Initiating Work-Sharing.......................................8
Restraining Benefit Costs......................................9
List of Tables
Table 1. Average Weekly Overtime Hours of Production Workers in Manufacturing
Industries, 1956-1999........................................2

Longer Overtime Hours: The Effect of the Rise
in Benefit Costs
The failure of Verizon management and union negotiators to settle on new terms
in expiring collective bargaining agreements led to a lengthy strike in August 2000
that renewed interest in employers’ seemingly increased use of overtime. In this
instance, the concern about working longer hours chiefly was portrayed in the media
as making it difficult for people to balance work and family responsibilities. In other
words, it was reported that the telecommunications company regularly and with little
notice required employees to put in overtime which, in turn, caused them to alter day-
care arrangements or make other last-minute changes in family or social activities.
Previously, some observers noted that manufacturers had employees working
more overtime while little job growth meant that factory employment did not regain
its pre-recession level by the end of the 1990s. Although many millions of jobs have
been created in nonmanufacturing industries during the rebound from the 1990-1991
recession, these individuals believe that even more people would be hired if a change
had not occurred in the employment-hours calculation of firms.
An explanation that has been offered for employers’ greater reliance on overtime
hours is the increase in employee benefit costs compared to overtime costs. About
6 decades ago, Congress set the overtime premium that firms must pay employees for
working more than 40 hours a week in the Fair Labor Standards Act (FLSA) at 1½
times a covered worker’s straight-time wage rate.
This report examines whether employers did, in fact, rely more on overtime in
the 1990s than in earlier decades. It then explores why overtime hours might
fluctuate in the short-run and why they might have increased in the long-run. The
report concludes with an analysis of whether raising the FLSA’s overtime premium,
implementing work-sharing, or curbing the growth of legally required employee
benefits would prompt firms to create more jobs.
The Trend in Overtime Hours Worked
Statistics on overtime hours are regularly collected for only production workers
in manufacturing industries who account for a small share of total employment. In

1999, for example, production workers in manufacturing industries made up just 12%

of all employees on private nonfarm payrolls and just 14% of all production or
nonsupervisory employees on private nonfarm payrolls.1 While one should therefore
be cautious about extrapolating the overtime versus employment experience of factory

1 U.S. Bureau of Labor Statistics. Employment and Earnings, March 2000.

workers to other sectors of the economy, the previously mentioned labor-management
dispute at a major telecommunications company suggests that the following analysis
may be more broadly applicable.
Table 1. Average Weekly Overtime Hours of Production Workers in
Manufacturing Industries, 1956-1999
Year Overtime Year Overtime Year Overtime
1956 2.8 1971 2.9 1986 3.4
1957 2.3 1972 3.5 1987 3.7
1958 2.0 1973 3.8 1988 3.9
1959 2.7 1974 3.3 1989 3.8
1960 2.5 1975 2.6 1990 3.6
1961 2.4 1976 3.1 1991 3.6
1962 2.8 1977 3.5 1992 3.8
1963 2.8 1978 3.6 1993 4.1
1964 3.1 1979 3.3 1994 4.7
1965 3.6 1980 2.8 1995 4.4
1966 3.9 1981 2.8 1996 4.5
1967 3.4 1982 2.3 1997 4.8
1968 3.6 1983 3.0 1998 4.6
1969 3.6 1984 3.4 1999 4.6
Source: U.S. Bureau of Labor Statistics.
The amount of overtime hours worked in manufacturing industries has been on
a rising trajectory. As shown in Table 1, overtime among factory workers was less
than 3 hours per week from 1956 through 1963. It then rose to and generally
remained in the 3-hour range from 1964 to 1992. Overtime did not exceed 4 hours
per week until 1993, and has remained in the 4-hour range since then.
Employers’ increased reliance on overtime becomes clearer when the same data
are looked at in another way. Factory workers put in an average of 2.5 hours of
overtime in the first 8 years (1956-1963) of the period under consideration. During
the next 29 years (1964-1992), overtime lengthened by just 0.9 hours — or 0.3 hours,
less than 2 minutes, per year on average — to 3.4 hours per week. Overtime among
manufacturing workers then soared by 1.5 hours per week in the last 7 years of the

1990s — or .21 hours, almost 13 minutes, per year on average — to 4.9 hours.

Short-Run Explanations
Not unexpectedly, the fluctuations in employers’ use of overtime coincide with
the ups and downs of the business cycle. During a recession (e.g., 1957-1958, 1960-
1961, 1969-1970, 1973-1975, 1981-1982 and 1990-1991), employers faced with
declining demand for their products cut back on the use of labor — both in terms of
the number of employees and the number of (standard and overtime) hours. For some
period after a recession ends and product demand is on the rise, firms work their
current employees longer hours rather than invest in new plant and equipment or in
human capital. Until they feel fairly certain that good economic conditions will
continue, businesses do not want to incur the quasi-fixed labor costs associated with
recalling laid-off employees or hiring new employees.2
Quasi-fixed non-wage labor costs are one-time expenses which firms incur when
they hire or fire workers (e.g., initial training costs as well as severance and
supplemental unemployment payments) and ongoing expenses which firms incur while
an employee is on the payroll that vary less than proportionately with the number of
hours the employee works (e.g., health insurance premiums and pension
contributions). The distinction between quasi-fixed and variable labor costs, then, is
that the former “are not fully adjustable when employers alter hours of work through
overtime or shortened shift lengths.”3 (The concept of quasi-fixed non-wage
employment costs will be addressed more fully later in the report.)
In addition to the business cycle explanation for the short-run variability of
overtime hours, firms might use overtime to avoid the reduced output that could
otherwise result from employee absences, equipment problems or strikes. They might
also have their employees work longer hours to fill unexpected rush orders placed by
customers or to meet recurring seasonal spikes in demand (e.g., Christmas and
summer holiday periods). The impetus to use overtime for these reasons would seem
to arise intermittently and at varying times in different industries. Unless these factors
have become increasingly prevalent over the years and increasingly pervasive across
manufacturing industries, they have not likely contributed much to overtime’s long-
term rise in the nation’s factories.
Long-Run Explanations
It has been suggested that, since the 1980s, manufacturers have tried to keep
inventories below historical levels and to instead meet fluctuations in demand through
just-in-time production schedules. The fairly recent initiation of just-in-time
production might thus be contributing to some of the escalation in manufacturers’

2 Hart, Robert A. Working Time and Employment. Winchester, Mass., Allen & Unwin, Inc.,

1987. (Hereafter cited as Hart, Working Time and Employment)

3 Golden, Lonnie M. Unions, Nonwage Labor Costs, and the Character of Labor Market
Adjustment, 1929-1987. Quarterly Review of Economics and Finance, v. 32, no. 2, summer
1992. p. 53. (Hereafter cited as Golden, Unions, Nonwage Labor Costs, and the Character
of Labor Market Adjustment)

reliance on overtime in the 1990s.4 This practice is not likely to have affected the
work schedules of employees in nonmanufacturing industries because their goods and
services could by-and-large never be stockpiled. However, the belief that to remain
competitive businesses must be able to suit their customers’ schedules (e.g., making
cable television repair calls in the evenings and on weekends) appears to have become
increasingly widespread in recent years.
All other things being equal, a firm makes its employment-hours decision based
on the least cost combination of the number of workers and the number of hours per
worker. This optimal combination is achieved when, for a given increase in output,
the marginal (i.e., additional) cost of hiring one more employee equals the marginal
cost of working current employees one more hour. A factor widely regarded as
influencing the optimal combination is the per-employee (i.e., quasi-fixed) non-wage
cost of labor: increases in the share of total labor costs that is more affected by
changes in employment levels than by changes in hours worked create an incentive for
cost-minimizing firms to lengthen the workweek rather than expand employment; and
higher quasi-fixed non-wage labor costs compared to the overtime wage rate raises
the likelihood that employers will substitute overtime for additional hiring.5
Non-wage employment costs that largely are independent of the number of hours
worked include employers’ expenditures associated with employee turnover (e.g., the
cost of recruiting, processing, and training new employees or terminating current
employees). Turnover costs typically are not included in empirical analyses because
of the paucity of comprehensive data on all its elements (e.g., on employee orientation
or on litigation). For example, it has been asserted that firms have become
increasingly reluctant to hire new employees because new laws or regulations have
enabled more groups of workers to sue them or to bring complaints against them
before government agencies concerning why the individuals were not hired or were
terminated. 6
Non-wage employment costs that largely are independent of the number of hours
worked also include employers’ expenditures associated with certain employee
benefits. Although there is no standard definition of benefits, the following
supplements to wages often are regarded as such: paid rest and lunch periods, wash-
up time, travel time, set-up time, etc.; pay for time not worked (e.g., for vacations,
holidays, personal illness, and family leave); health, retirement, and life insurance;
legally required payments (e.g., unemployment and workers’ compensation and social
security benefits); and other (e.g., child care and employee discounts as well as meal
and housing allowances).7 Not all of these benefits are quasi-fixed (per-

4 From 1979 to 1989 (cyclical peaks), overtime averaged 3.2 hours per factory worker. From

1989 to 1999, overtime increased an average of 90 minutes to 4.7 hours.

5 Ehrenberg, Ronald. Fringe Benefits and Overtime Behavior. Lexington, Mass., D.C. Heath
and Company, 1971.
6 See, for example, Gallaway, Lowell, and Richard Vedder. Labor Laws: Then and Now.
Journal of Labor Research, v. XVII, no. 2, Spring 1996.
7 Hart, Robert A. The Economics of Non-Wage Labour Costs. London, George Allen &

employee) costs. Some benefits have both fixed and variable (per-hour) elements,8
which complicates their treatment for researchers and for policymakers.
According to the U.S. Chamber of Commerce and the U.S. Bureau of Labor
Statistics, employer costs for employee benefits increased from less than 3% of total
compensation (wages and salaries plus supplements) in 1929 to almost 30% today.
For the employer cost of employee benefits to be an explanatory factor in overtime’s
long-term growth, it is not sufficient for it merely to have increased. This cost must
also have risen more sharply than the marginal cost of overtime. In other words, the
ratio of the marginal cost of benefits to the marginal cost of overtime would have to
be higher today than in the past to have induced firms to utilize their existing
workforces more intensively rather than hiring from the external labor market.
In a number of economic analyses, researchers found a strong positive
relationship between the use of overtime hours and per-employee benefit costs relative
to the overtime wage rate. These studies suggest that employment might rise by, at
most, between 0.3% and 4.0%; however, “these estimates are larger than the actual
employment gains that would result since many of the assumptions upon which they
are based prove to be invalid.”9 (The following are among the unrealistic
assumptions, some of which will be elaborated on later in this report: hours and
workers are perfect substitutes in the production process; straight-time hourly wages
and fringe benefits are constant; employees will not moonlight; and labor is
homogenous.) Evidence of statistical problems with the studies also calls into
question the confidence that should be placed in these results.
An analysis which attempted to overcome some of these limitations produced
mixed results. An increase in the overtime premium would decrease overtime hours
at nonmanufacturing establishments but have no effect at manufacturing
establishments; in the case of manufacturers, an increase in quasi-fixed benefit costs
was found to decrease overtime.10 One explanation offered for the statistically
insignificant relationship between the overtime wage and hours in manufacturing is
that the production process of manufacturers might make employment less
substitutable for hours than is true in nonmanufacturing industries.

7 (...continued)
Unwin, Ltd., 1984; and U.S. Chamber of Commerce. Employee Benefits. U.S. Chamber of
Commerce, published annually.
8 For example, for employees with earnings below the unemployment insurance or social
security programs’ maximum taxable wage ceilings, the employer’s tax is a variable labor
cost (i.e., additional tax must be paid if more hours are worked and earnings rise); for
employees with earnings above the ceiling, the employer’s tax is a fixed cost (i.e., the amount
of the tax does not change regardless of the number of hours these employees work). Owen,
John D. Reduced Working Hours: Cure for Unemployment or Economic Burden? Baltimore,
MD, Johns Hopkins University Press, 1989.
9 Ehrenberg, Ronald G., and Paul L. Schumann. Longer Hours or More Jobs? Ithaca, N.Y.,
Cornell University, 1982. p. 15.
10 Ibid.

Depending on the specification model used, the researchers estimated maximum
employment gains from raising the overtime premium to double time of 0.5% to 1.5%
in manufacturing and 0.8% to 1.8% in nonmanufacturing firms. The economists
cautioned that the failure to find a statistically significant negative relationship
between a change in the overtime wage rate and overtime hours in manufacturing
should reduce confidence in the belief that an increase in the overtime premium
would lead to a substantial reduction in the use of overtime hours in United States11
Another study, which did not separately analyze manufacturers and nonmanufacturers,
similarly failed to find that the FLSA has spurred job growth by curbing the use of
overtime. 12
As previously noted, the above-described analyses assumed that the hourly wage
remains constant when the overtime premium is changed. However, assuming that
employees and employers have agreed upon a combination of total weekly hours and
weekly earnings, a hike in the overtime premium could leave both weekly hours and
earnings unchanged if employers are able to sufficiently reduce the straight-time wage
rate. In other words, under this hypothesis, raising the overtime premium would not
create additional jobs.13 The results of this analysis suggest that hourly wage
adjustments occur, but not to the extent the employment effect is completely offset.
Nonetheless, decreases in the straight-time hourly wage of workers earning above the
federal or state minimum wage could limit the job-creating effectiveness of raising the
overtime premium.14
Policy Implications
A variety of implications for job creation could be drawn from the forgoing
theoretical and empirical discussion. They range from government changing the costs
of overtime and of benefits, to initiating work-sharing, to Congress’ taking no action
to spur job growth in an economy with the lowest unemployment rate in decades.

11 Ibid., p. 23.
12 Golden, Unions, Nonwage Labor Costs, and the Character of Labor Market Adjustment.
13 Trejo, Stephen J. The Effects of Overtime Pay Regulation on Worker Compensation.
American Economic Review, v. 81, no. 4, September 1991.
14 Exemptions are narrowly defined under the FLSA. Examples of groups of employees
exempt from the Act’s overtime premium include: executives, managers, and professionals;
outside salespersons; employees in certain computer-related occupations and of certain
seasonal amusement or recreational establishments; agricultural workers, motion picture
theater employees, and casual babysitters/persons employed as companions to the elderly or
infirm; and some commissioned employees of retail or service establishments.

Raising the Overtime Premium
Some observers might recommend that the FLSA be amended to raise the
premium for working more than 40 hours in a week from one-and-a-half times a
covered, nonexempt employee’s straight-time wage rate in order to discourage
employers from regularly scheduling overtime and thereby, to encourage them to
spread to or share with unemployed workers the available hours of employment.
Proposals to increase the overtime premium have been made in the past,15 with their
proponents arguing that its deterrent effect has been eroded since its impositions some

6 decades ago by the growth in employer costs for employee benefits.16

How well an increase in the overtime premium might succeed at creating more
jobs or at lowering the unemployment rate is questionable. Not all of the now
regularly scheduled overtime hours might translate into new jobs, particularly full-time
jobs, because of the reactions of employers and employees to the policy change:
!If firms substitute new employees for overtime hours, compensation
costs per hour worked would rise because of the previously
discussed quasi-fixed non-wage employment costs. As a
consequence, firms might reduce their demand for workers and
increase their use of now relatively less expensive capital.Firms might
pass the increase in their labor costs on to consumers through higher
prices. If consumers responded by cutting back on purchases, firms
might then curtail output and employment.
!Raising the overtime premium would increase the amount of money
that firms could save if they did not comply with the federal law.
The rate of noncompliance might rise as a result, which would lower
the amount of job creation associated with the policy change.If the
premium increase prompted firms to cut back their use of overtime,
the earnings of employees who formerly worked the extra hours
would fall. These workers might decide to moonlight (i.e., take
second jobs) to maintain their prior earnings level, which would
reduce the number of new jobs potentially available to unemployed
!Employers, in order to minimize the fixed labor costs associated with
substituting new employees for overtime hours, might create part-
time jobs because they typically offer fewer benefits than full-time

15 Representative Conyers introduced bills in the 95th - 99th Congresses (H.R. 11784 in the 95th
Congress, H.R. 1784 in the 96th - 98th Congresses, and H.R. 2933 in the 99th Congress);th
Representative Dent introduced H.R. 10130 in the 94 Congress; Representative Murphyth
introduced H.R. 5808 in the 98 Congress; and Representative Blackwell introduced H.R.rd
3267 in the 103 Congress, which would have among many other things increased the
overtime premium to double-time.
16 U.S. Congress. House. Committee on Education and Labor. Subcommittee on Labor
Standards. To Revise the Overtime Compensation Requirements of the Fair Labor Standardsthst
Act of 1938. Hearings on H.R. 1784, 96 Cong., 1 Sess., October 23-25, 1979.
Washington, U.S. Government Printing Office, 1980.

jobs. And, the moonlighting workers mentioned above, might fill
some of these part-time positions.
Moreover, the very heterogeneity of labor could limit the potential employment
gain or unemployment reduction associated with an increase in the overtime premium:
!The skills of those who work overtime and the skills of the
unemployed would have to be similar in order for the latter to
adequately function as substitutes for the former. If there were a
skills mismatch between the two groups, it would reduce the
employment effect of the policy change.17
A comparison of the characteristics (i.e., education, age, and occupation) of those
unemployed and those working longer than 40 hours per week in March 1992 found
the two groups to be quite different.18
This last point is likely to be especially relevant in the current economic climate,
when the unemployment rate has been at its lowest level in three decades. Because
the nation has experienced considerable job growth since the 1990-1991 recession,
firms that have wanted to expand output and employment in this extremely tight labor
market have had to hire workers further back in the unemployment queue. As these
new hires likely are less productive (i.e., contribute less additional output) than those
already holding jobs, they raise the firm’s cost of production. The cost of labor will
rise even further if, in response to skill imbalances or “shortages,” firms compete for
qualified workers by bidding up compensation. Instead of the unemployment rate
falling much below its current level, wages and prices could rise — possibly
prompting the Federal Reserve Board to raise interest rates in order to slow the rate
of economic and employment growth. Consequently, other observers might argue
that the government should take no action to promote additional job growth despite
firms’ increased reliance on overtime work.
Initiating Work-Sharing
Another means that some have advocated to spread employment across more
members of the labor force is lowering the number of weekly hours per employee at
a single firm. This shortening of per-employee work time commonly is referred to as
work-sharing. In the United States, work-sharing might take the form of reducing the

17 An analysis by Statistics Canada estimated that the mismatch between job qualifications
and unemployment workers’ qualifications would reduce the job-creating effect of limiting
overtime hours from 169,000 to 93,000 private sector jobs in November 1995. The
geographic mismatch of jobs created and qualified unemployed workers was found to further
diminish the potential employment effect of converting overtime hours to full-time jobs.
Employment Policies: Converting Overtime to Jobs Not Feasible Solution, Statistics Canada
Analyst Says. Daily Labor Report, January 23, 1998.
18 Fitzgerald, Terry J. Reducing Working Hours: American Workers’ Salvation? Federal
Reserve Bank of Cleveland’s Economic Commentary, September 1, 1996.

FLSA’s 40-hour-a-week standard19 or of implementing programs to preserve (as
opposed to create) jobs in periods of deficient demand.20 Work-sharing has gained
more interest abroad than in the United States, where in recent decades the jobless21
rate has been lower and where unions have relatively fewer members.
As in the case of raising the overtime premium, the effectiveness of work-sharing
at creating jobs is affected by differences in the skill mix of workers and by the
reactions of employers and employees to a cutback in work time. According to a
review of studies that looked at the relationship between reduced hours and
employment or output,
[t]he bulk of the nonexperimental evidence suggests that work-sharing can raise
employment through the substitution of bodies for hours. However, most of the
evidence is generated by employer and employee interactions, not by governmental
intervention in markets. Employers and employees may respond differently to
state-imposed hours reductions or reductions in hours negotiated by union and
management, than to changes that arise from their own initiative. In addition, most
of the studies do not explore the possible effects of work-sharing on hourly pay,22
effects that can be crucial to its impact on employment.
An increase in hourly pay to maintain annual earnings in response to a decrease
in an employee’s standard hours at a given firm would limit work-sharing’s ability to
spur job creation. So too would currently employed workers’ refusal to curtail total
hours. Those employees who already are at or above their desired level of hours
when work-sharing is instituted might demand little or nothing in the way of
compensation for a shortened workweek. However, those employees who are
working fewer hours than they would like might demand an increase in the straight-
time hourly wage or might choose to moonlight. Either one of these actions would
dampen the impact of work-sharing on the unemployed.
Restraining Benefit Costs
Rather than focusing on the hours side of the equation, other interested parties
might urge that the rate of increase in benefit costs be curbed in order to promote
greater job growth. Federally mandated benefit programs include workers’
compensation (WC), social security (SS), and unemployment insurance (UI).

19 See legislation in footnote 15.
20 The latter form of work-sharing has been used by some states. The unemployment
insurance (UI) system favors adjustment to demand through layoffs rather than through
reduced per-employee hours. “Short-time compensation programs” have tried to preserve jobs
and offset the UI system’s bias against work-sharing by allowing employees whose hours were
cutback to receive partial unemployment benefits.
21 Hunt, Jennifer. Hours Reduction as Work-Sharing. Brookings Papers on Economic
Activity, 1:1998.
22 Freeman, Richard B. Work-Sharing to Full Employment: Serious Option or Populist
Fallacy? In Freeman, Richard B., and Peter Gottschalk. Generating Jobs: How to Increase
Demand for Less-Skilled Workers. N.Y., Russell Sage Foundation, 1998.

Congress historically has had a very limited role in the WC program. It sets rules
only for federal, maritime, and railroad employees. Thus, the program is largely
mandated by state, not federal, law. WC costs under the state systems are affected
by a number of factors, only two of which — the level of benefits and rules for
proving eligibility of benefits — are directly controlled by state governments. Other
important factors include the return on insurance company investments (the majority
of program costs are financed through private insurance companies); employers’
injury experience; the riskiness of the covered employment; changes in medical costs,
workplace safety, and in payroll size; the extent of regulation by state insurance
commissioners; and the degree to which companies choose to self-insure. Because
numerous factors influence the cost of WC, states would likely have to make
relatively major changes in benefit levels or eligibility rules in order to have much of
an impact on employer expenditures.
With respect to SS, it is unlikely that Congress would want to reduce the cost
to employers because that would mean less revenue to pay for retirement and health
benefits for the elderly — programs expected to experience increasing financial strain
in the coming years as the baby-boom generation leaves the labor force. Moreover,
as previously mentioned, some benefits are a mixture of per-hour (variable) and per-
worker (fixed) costs. The employers’ SS contribution is largely a variable cost
because employees typically have earnings below the program’s maximum taxable
wage ceiling. In other words, the amount of employers’ payroll taxes vary directly
with the number of hours worked by, and hence, wages paid to employees up to the
program’s earnings ceiling. Therefore, “it is unlikely that reduction in firms’ payroll
taxes would provide incentives to create new jobs. [Based on] the underlying theory,
... it is average hours rather than employment that may rise as a result of cuts in
taxes.” 23
In contrast, the federal unemployment tax rate is assessed against a fairly low
earnings level. The federal share of the tax to finance the UI program thus is by-and-
large a fixed cost for employers. Economic theory suggests that changing the
program’s financing structure by increasing the federally set wage ceiling (and
correspondingly decreasing the tax rate) would make the program more of a variable
cost to firms and therefore reduce employers’ propensity to substitute hours for jobs.
However, much of UI’s financing is determined at the state level where such factors
as experience rating as well as differing taxable wage bases and tax rates greatly affect
the actual cost of the program to employers.

23 Hart, Working Time and Employment, p. 274.