In this first of two messages, I will explain what I mean by the "undertime
tax". In the second message, I will explore the effects that removing the
undertime tax could have on unemployment in Canada.
Everyone's heard of "overtime premiums" -- such as the widespread provisions
for time and a half payment for work in excess of eight hours a day or forty
hours a week. How many people are aware of the undertime taxes, which are in
some cases higher than "time and a half"?
Overtime premiums are considered by economists to be a kind of tax, the
proceeds of which go to the employer rather than to the government. The
rationale for overtime premiums goes as follows: overtime work has external
social costs in that it contributes to higher unemployment; and the marginal
utility of an extra hour of work (at regular pay) to a full time employee is
frequently less than the value of an hour of leisure but workers often have
little power to refuse overtime work; therefore an overtime premium works
both to discourage socially undesirable overtime and to compensate the
employee in the event that overtime is necessary.
Using a standard collective agreement from the B.C. forest industry for an
example, I calculate the _effective_ overtime rate to be around 16%, not the
nominal 50% of employment standards legislation and collective agreements.
This is because of the effect of fixed labour costs such as payroll taxes,
many fringe benefits and certain kinds of paid time off (i.e., statutory
holidays but not annual vacation pay).
Using the same contract as a reference point, I calculate _UNDERTIME
PREMIUMS_ as ranging from 18% an hour for a one hour reduction in the
standard work week, to 21% an hour for a ten hour reduction in the work
week. Admittedly, however, this is a bit of a phantom calculation because it
spreads the added labour costs of a higher per hour average over a span of
"hours not worked". A more concrete calculation would spread the additional
cost over hours actually worked, but would be less intuitively comparable
with the more familiar overtime premium.
To do a calculation that is both concrete and intuitively comparable, I
calculate the cost of 480 hours of a 48 hour "overtime week"(10 employees);
a 32 hour, 5 day "undertime week"(15 employees); and compare the "overtime
week" and the "undertime week" with the standard week (12 employees):
Standard week =$17603.34
Overtime week =$18057.69
Undertime week = $18347.18 (the cost for the undertime week would be
$18283.23 if we assumed a four-day week)
To be mathematically scrupulous in our calculations, we should note that in
our example, an eight hour _reduction_ in the work week creates 120 hours of
"undertime" (that then have to be made up by the hiring of three new
workers) compared with the 80 hours of overtime created by an eight hour
increase in the work week. This makes the per hour undertime premium just
slightly higher than the per hour overtime premium, or, in the case of a
four day week, the undertime and overtime premiums are almost identical. But
it should be remembered that the undertime premium applies to 50% more hours.
In short, it is cheaper to increase the length of the work week than to
decrease it. The above calculation doesn't include the extra hiring and
training costs of enlarging a company's work force. It also assumes a
constant demand for labour at the varying hourly costs.
But here is the important point: the overtime and undertime premiums shown
above include only those elements of labour cost that are the direct or
indirect result of government tax policy or employment standards regulation.
The undertime premium does not express any feature of labour market supply
or demand -- it is entirely a creature of public policy.
Despite any claims to the contrary that Finance Minister Paul Martin may
make ("Neither the Bank of Canada nor the government has 'chosen' to keep
the unemployment rate at a high level."), official government policy in
Canada is to maintain high rates of unemployment by restricting the
shortening of work time.
I have written the prototype for a computer program that clearly and vividly
shows the effects of the undertime premium and I am in the process of
revising it so that it will be flexible enough to do the calculations for
any given combination of payroll taxes, fringe benefits and work schedules.
Expressions of interest are welcome.
In my next message, I will discuss estimates of the job creation potential
of voluntarily reducing work time.
Regards,
Tom Walker
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knoW Ware Communications |
Vancouver, B.C., CANADA | "Only in mediocre art
[EMAIL PROTECTED] | does life unfold as fate."
(604) 669-3286 |
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