A business experiencing growing demand for its product or service, and thus requiring an increase in hours worked, is confronted with the choice of paying overtime to existing workers, or committing to hiring new workers. Many businesses are likely to choose paying overtime until they are certain that the increase in demand will be sustained.

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The quantity of hours worked at a particular business is a reflection of supply and demand in the labor market. For example, hours worked at a business will rise if the firm's demand for labor increases (which can occur because of improved labor productivity of increased demand for the firm's product), or if the supply of labor increases. By the same token, hours worked in the overall economy will increase if, for example, labor productivity rises or the demand for final goods and services rises.

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If businesses are confronted with growing demand for the product or service they produce, they have the choice of having their existing employees work more hours, which usually involves paying overtime, or keeping hours worked the same and hiring new workers. While hiring new workers eliminates the need for overtime pay, it requires the firm to incur training costs, and to pay additional health and retirement benefits for the new employees. Yet working too much overtime can impair worker productivity.

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The quantity of hours worked in the labor market is a reflection of supply and demand. For example, if demand for a firm's good or service rises, then the firm will either demand more hours of work out of its existing labor force, or it will increase labor by hiring new workers. Increasing hours worked by the existing labor force will be favored if the firm is not certain that the increase in demand for its product will last very long, if the cost of training new workers is high, or if relatively little overtime must be paid.

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In the early and uncertain stage of a growing economy, employers will tend to increase the average hours worked per employee to keep pace with increasing demand. Yet worker productivity can be impaired if they are asked to accept too much overtime. Thus as economic growth continues and becomes more assured, firms are more likely to commit to hiring new workers, which can allow hours worked per employee to decline.

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In the early and uncertain stage of a growing economy, employers will tend to increase the average hours worked per employee to keep pace with increasing demand. Yet worker productivity can be impaired if they are asked to accept too much overtime. Thus as economic growth continues and becomes more assured, firms are more likely to commit to hiring new workers, which can allow hours worked per employee to decline.

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