Monday, July 6, 2015

Obama's Overtime Pay Edict Is Over the Top

The Obama administration is patting itself on the back once again, this time for extending overtime pay. The Fair Labor Standards Act of 1938 (FLSA) guarantees, amongst other things, that most employees are paid time-and-a-half for overtime if they work an excess of 40 hours a week. Anyone who makes above the threshold is not guaranteed overtime under the FLSA. Under current law, there is a salary threshold of $23,660, which means that anyone who makes more than that is not guaranteed overtime. Raising the threshold to $50,400 would provide more workers with overtime protections, which is why the Department of Labor (DoL) is calling the new proposed law a "fair day's pay for fair day's work." The DoL claims the bill can affect up to five million workers and increase the take-home pay for the middle class, which is good for middle class workers because of what the Left-leaning Economic Policy Institute (EPI) calls stagnant wages. The EPI would also point out that increasing overtime pay would mitigate "wage theft." Passing legislation with the intent to help workers earn more sounds great, but much like with minimum wage and other labor laws, I have to ask myself whether such intervention is as simply, clear-cut, or pristine as proponents make it out to be.

The National Association of Manufacturers (NAM) came out with a press release in response, in which it called this proposal a 1930s-era regulation that has caused the "demolition of five million Americans." For the NAM, this proposal is a "another [regulation] in a long list of regulatory roadblocks to healthy and robust economic growth and job creation." The National Retail Federation  (NRF) also does not like the proposal, saying that this proposal will "add to employers' costs, undermine customer service, hinder productivity, generate more litigation opportunities for trial lawyers and ultimately harm job creation." These blunt, damning statements seem to cover the issues of expanded overtime well enough, but I still feel like elucidating a bit more.

Let's start with some research on the topic. The NRF study, based off of findings from economic forecasting firm Oxford Economics, found that it could cost employers up to $874 million in additional costs, not to mention additional compliance burdens. The American Action Forum found that it would only impact 3 million workers, 69 percent of whom are making household income three times above the federal poverty line. Another unintended consequence I didn't initially think of is how it would make flexible scheduling more difficult because flex time involve monitoring worked hours. The Heritage Foundation also provides a good list of empirical research that shows the adverse effects of mandate overtime pay.

While it might seem noble to want to help the working middle class, proponents might not want to celebrate quite yet. Why? They will have to run into the reality that if you make hiring a class of workers more expensive, the employer will try to do something to adjust for that loss in profits. How can the employer possibly respond to this overtime mandate?

One way is to cut base wages of current employees [or reduce the base wage when hiring someone] in order to offset the higher costs of overtime. One study shows that many employers opted for that change when the 2004 overtime regulation changes took place (Barkume, 2010). Another option is to cut work hours while hiring new workers who will work less hours (thereby creating more part-time workers), which is what happened when the FLSA was initially implemented (Costa, 1998). Even the EPI conceded this point back in 2014. For those who make a salary at the upper end of the threshold, boosting the wage just above the threshold is another way of avoiding overtime. Depending on the level of automation of the job, the employer might find a way to find a robot or automated machine to do the work. Passing on the cost to the customer is a possibility. Simply bearing the brunt of the cost of overtime pay is also a possibility, but given how profit plays as an important incentive in business decisions, we should not be at all surprised if or when businesses find ways to circumvent the overtime pay, much like they have in the past.

You want to confront corporations whose profits have increased while wages have reportedly stayed stagnant, this is not the way to go about it. We don't need a policy that increases the cost of hiring labor while creating little to no benefit. What America needs is a broader jobs agenda in which we encourage more job growth and economic growth, but making labor more expensive is not one of those ways.

November 14, 2016 Addendum: On December 1, the overtime laws are supposed to take effect. The Congressional Budget Office recently released a paper on what economic effects would take place if the overtime laws were cancelled prior to. The CBO found a decrease in payroll and compliance costs, as well as an increase in profit. While the salaries would somewhat decrease, real family income would increase because an increase in profit and decrease in prices would offset the salary decrease.

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