Wage Hysteresis and Entitlement Effects: The Persistent Impacts of a Temporary Overtime Policy*.

This article examines the labor market effects of the unexpected 2016 retraction of a U.S. federal overtime regulation that would have raised the Fair Labor Standards Act (FLSA) overtime exemption threshold from $455 to $913 per week, extending overtime protections to about 20% more salaried workers. Using administrative payroll data from ADP covering over one-tenth of the U.S. labor force, the study finds that despite the policy being blocked before implementation, employers raised and maintained workers' salaries at the $913 threshold for at least 18 months afterward, demonstrating persistent wage hysteresis. The analysis shows no subsequent slowdown in wage growth for affected workers, no reduction in new hires' wages, and no significant negative impact on aggregate employment, though separation rates among raised workers declined. Survey evidence and a theoretical model suggest that concerns about employee morale, including entitlement effects and preferences for horizontal pay equity, are key mechanisms driving firms' reluctance to reverse wage increases, highlighting how temporary wage policies can create lasting changes in labor market equilibrium beyond their legal enforcement.