Should California Reconsider the Four-Day Workweek?
California proposed a new bill (AB 2932) that would effectively shorten the workweek from five days to four days. Nonexempt employees working in businesses with 500 or more employees would need to be compensated at 1.5 times their regular rate of pay after working 32 hours in a workweek. Moreover, their compensation at 32 hours must equal what their compensation was at 40 hours.
The bill has failed to advance. However, advocates are not giving up. Co-writer of the bill, Evan Low, plans to hold an informational hearing in order to better understand what needs to be changed to give the bill a better shot. As it stands now, the proposed bill could affect almost 2 million workers and likely increase labor costs for large employers by millions of dollars.
Approximately 2 million workers could be impacted if AB 2932 is passed.
According to the Employment Development Department, there are 3.6 million employees (22% of all employees in California) working in businesses with 500 or more employees. However, this 22 percent includes workers who are not eligible for overtime under this bill, such as those who are exempt or those who are covered by Collective Bargaining Agreements. An estimated 28 percent of all workers in California could be considered exempt or covered by a union.1 Assuming this percentage holds across all businesses, approximately 2.6 million workers or 15 percent of all employees would be eligible for overtime after 32 hours under the proposed bill.
Not all employees work enough hours in a workweek to receive overtime.2 Approximately 68 percent of all estimated nonexempt employees in California work 40 or more hours in a workweek and an additional 7 percent work between 32 and 40 hours.3 Therefore, instead of the 3.6 million employees working in large businesses, the proposed bill as it stands now would more likely impact almost 2 million workers or 12 percent of all employees in California.
Employers would likely face increased labor costs.
In a perfect world, workers would work less while maintaining the same productivity. Workers would then benefit from more leisure time without losing compensation, and employers would benefit from happier workers without increased costs. Unfortunately, we rarely live in a perfect world and not every working hour reduction results in an increase in productivity. For example, a study from the Netherlands examined the effect of a policy reduction in the working time of nurses during a labor shortage and found the reduction in working time was associated with a decrease in surgical productivity. It also found that the existing labor shortage became more apparent, and nurses were asked to work during their time off.
If productivity decreases as a result of the shortened workweek, employers may decide to have their current employees work at least some overtime. Full-time employees making minimum wage earn $600 a week ($15 x 40 hours). Under the proposed bill, these employees would still earn $600 a week, effectively increasing their hourly rates by 25 percent to $18.75 ($600 / 32 hours). If minimum wage employees continue working 40 hours, their weekly wages increase 37.5 percent to $825 ($600 regular pay + $225 overtime pay). Under this scenario, a business with 500 employees could expect annual labor costs to increase by at least of $3.2 million.4
Employers might try to avoid overtime costs by hiring additional workers. If employers maintain the total number of hours worked per week, a business with 500 employees could expect annual labor costs to increase by at least $2.1 million.5 If they hire additional workers full time, labor costs would increase further since employers would need to provide benefits to these additional workers. If they decide to split the 40 hour workweek across employees and make current workers part-time, this could save employers money on benefits.
However, The United States is experiencing a labor shortage. There are currently about 5.5 million more job openings than unemployed workers. Furthermore, the unemployment rate in California is 4.9 percent, almost back to the low it was before the COVID-19 pandemic. Therefore, employers might not be able to hire additional workers without paying an even higher hourly rate. Also, if employers try to reduce their current full-time employees to part-time, they risk these workers leaving for another job.
While this proposed bill could benefit an estimated 12 percent of California’s employees by either decreasing worktime or increasing wages, there is more that needs to be considered. If the bill eventually does advance, businesses with 500 or more employees will need to figure out how to maintain productivity while minimizing the burden of increased labor costs.
Workers are estimated to be exempt if they work in a managerial and professional, STEM, community services and arts, education, or healthcare professional occupation; earn over $58,240 annually; and work 40 or more hours in a workweek. Analysis of data from 2021 Annual Social and Economics Supplement of the Current Population Survey, IPUMS-CPS, University of Minnesota, www.ipums.org.
For the purposes of this analysis, I ignore the possibility of overtime after eight hours in a workday or overtime for working on the seventh consecutive day in a workweek.
Analysis of data from 2021 Annual Social and Economics Supplement of the Current Population Survey, IPUMS-CPS, University of Minnesota, www.ipums.org.
This scenario assumes all employees qualifying for the 32 hour workweek earn minimum wage and continue to work 40 hours a week. Each of theses approximately 271 minimum wage employees would earn $225 more a week or $11,700 more a year.
This scenario assumes the new hires would also receive the increased hourly rate of $18.75. Additional workers would need to be hired to make up 2,168 hours a week or 112,736 hours a year.