Anticipating the Effects of New Overtime Rules, Over Time

So much for good intentions.



Wouldn't it be nice if your boss were forced to pay you more because the government said so? Not if—as the result of the government's intervention—you lost your job, saw your salary reduced or couldn't work from home anymore. Yet that's what the Obama administration is trying to do by requiring that employers pay overtime for salaried employees who earn less than $50,440 per year.

Under the Fair Labor Standards Act, most employers must pay time and a half for overtime hours (usually understood as hours worked above and beyond 40 hours per week) for salaried employees who don't have sufficiently advanced job duties or make less than $23,660 annually. Employers only have to track the hours of salaried employees eligible for overtime.

Under the new rules, the salary threshold would be raised to $50,440—and employers would track the hours of salaried employees making less than this amount, no matter how advanced their duties.

The underlying assumption behind the proposed rules is that employers are forcing their employees to work long hours without paying them appropriately. Increasing the salary threshold, the administration claims, would force employers to dish out higher pay to their employees, hire new workers or give part-time ones longer hours rather than overwork their current workforce. According to the administration, this mandatory overtime pay would increase the earnings of about 5 million workers.

As they say, the road to hell is paved with good intentions. With these proposed rules, the administration just added a few more bricks on that already-long road. For one thing, it fails to demonstrate that there is indeed a rampant problem of underpayment and overwork in our labor force. But even if there were a problem, this would hardly be the way to address it.

I have never understood how anyone can believe that forcing employers to pay employees more could lead to more hiring and more available hours for employees. After all, labor is like every other good or service. If you raise its price, over time the demand for it will go down.

In a paper about the proposed rules published last summer, Heritage Foundation labor economist James Sherk reviews the literature on the economic impact of expanding overtime coverage and finds that "employers largely respond to new overtime requirements by cutting base pay—leaving total hours and earnings little changed."

This isn't surprising unless you think most firms are sitting on lots of unused cash that they could easily use to pay for overtime. Very few firms have this luxury, which means that the only way for businesses to meet the proposed requirements in the short term would be to shift resources around or reduce their profits—whether they can afford it or not.

Over time, companies would find ways to offset these new costs. For example, they might reduce the hours employees work so fewer of them work over 40 hours a week, or they might fire workers who are working over 40 hours and hire part-time workers instead.

In the longer run, employers could reduce the base wages so that total compensation (base wages plus overtime pay) would be the same as before the implementation of the new rule.

Unfortunately, while employees would be unlikely to see their earnings go up, the loss of flexibility in the workplace might be dearly felt. Sherk notes that the rules would "severely limit (workers') use of the flexible work arrangements and telecommuting options that many rely on to balance their work and family lives."

At a time when the sharing economy and nontraditional forms of work are expanding thanks to new technology and innovation, these proposed rules attempt to force everyone back into an old and outdated one-size-fits-all model.

So much for good intentions.