Department of Labor

Federal Regulations Work Overtime To Kill American Prosperity

Overtime rules that reduce worker and employer flexibility will ensure that there are few jobs and less money to go around in the years to come.

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Rest easy, hard-working Americans! The government is well aware of your strenuous labors, and plans to see that you're well-compensated—at a second job, or maybe off the books.

No need for the thanks, really. It's all in a day's bureaucratic work, punching out no later than 5.

Last week, to save Americans the grueling ordeal inherent in working things out among themselves, the U.S. Department of Labor doubled the salary threshold below which time-and-a-half pay for working more than 40 hours per week is mandatory starting December 1 of this year. Overtime at the government-set rate will have to be paid to those making less than $47,476 per year—up from $23,660. It will automatically increase every three years going forward.

The goal, say the feds, is to "spread employment by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours" and "to reduce overwork and its detrimental effect on the health and well-being of workers."

No need to fret, the feds assure us, there are "plenty of options" for complying with the new overtime rule:

  1. Pay time-and-a-half for overtime work.
  2. Raise workers' salaries above the new threshold.
  3. Limit workers' hours to 40 per week.

Some combination of the above.

That's easy then! It's an instant boost to pay and time off! Why didn't we think of this before?

Well… we did. It's been tried, and it didn't work out as planned. Experience tells us that the federal bureaucrats' list doesn't really detail all of the options available to employers and workers—and doesn't delve into the costs and trade-offs at all.

One option not mentioned on that list is the possibility that employers might farm out work to temps and part-timers. As Nick Gillespie has mentioned, economists Donald J. Boudreaux and Liya Palagashvili examined similar rules elsewhere for the Mercatus Center and found that in Canada "overtime pay regulation leads to greater moonlighting."

Imagine the employees of two companies punching out at 5 and crossing the street to do each other's jobs for a couple of hours, and you get the picture.

But it's not just a matter of turning extra hours into perverse job-sharing arrangements. That same Mercatus study notes that start-up companies—tech start-ups in particular—tend to demand long hours in return for equity compensation rather than cash. Employees willing to take a gamble can potentially benefit in a big way if a start-up pans out. Those would-be risk takers are bound to take a big hit from rules that reduce the flexibility they require for such arrangements.

Telecommuters, too, will likely take a hit, since they work out of sight of employers under-the-gun to pay extra for time worked over the 40-hour limit. Many businesses worried about facing unexpected costs will insist that employees work on-site where their hours can be monitored.

Those employers on the hook to keep the same people working over the limit can be expected to adjust base pay downward so that overall compensation, with overtime included, doesn't get a boost, the study notes.

Harvard economist Jeffrey Miron agrees. After a short period of padded paychecks for some workers, he says, "In the longer term, employers will reduce base-level wages so that, even with overtime, total compensation for employees working more than 40 hours is no different than before."

That's what people can do within the law. But responses to tight rules often take the form of simply ignoring them. A 2011 Reuters article on Italy's economy noted that the country's high taxes and intrusive red tape had driven many entrepreneurs, laborers, and established companies partially or entirely underground. Among the responses to labor regulations were "companies that violate rules by paying overtime off the books."

"The most influential factors on the shadow economy and/or shadow labor force are tax policies and state regulation, which, if they rise, increase both," commented economist Friedrich Schneider of the Johannes Kepler University of Linz, Austria, just a year later.

Not that this is a recent revelation. A 1994 working paper for the World Bank pointed out that labor regulations that raise worker compensation above the market level drive economic activity off the books—and subsequently retard further economic growth because of the uncertainty inherent in operating illegally.

None of these responses, you'll note, "spread employment" or "reduce overwork." They also don't put any more money in workers' pockets, because employers can't and won't pay more for labor than it's worth to them.

"Expanded overtime will benefit some employees in the short term; cost others their jobs or lower their compensation in the medium term; and have no meaningful impact in the long term," Harvard's Miron concluded in response to the new rules. "Is that good policy?"

No meaningful impact, that is, except for a lot of energy and innovation expended to accommodate the new rules to the economic reality that dictates that labor, like everything else, is worth what it's worth—not an arbitrary price chosen by bureaucrats. And the strangled start-ups, frustrated telecommuters, and under-the-table workers might also have a bone to pick.

That's a lot of hassle to address supposed problems that probably can't be fixed the way the Department of Labor wants to fix them—and may not actually be a concern at all. Looking at the Department of Labor's justifications for the new rule—spreading employment and reducing overwork—Boudreaux and Palagashvili objected that based on current economic knowledge, "there is neither theoretical nor empirical support that the proposed regulation will meet its stated objectives."

Bluntly, there's never been any reason to expect that the overtime rule would have the beneficial impact that the feds predict.

And there is likely no reason to even try to achieve that impact. They add, "We find that the department provides no evidence that an 'underpayment' or 'overwork' problem exists in the United States."

There is evidence though—strong evidence from sources including the government's own Small Business Administration—that "small businesses, defined as firms employing fewer than 20 employees, bear the largest burden of federal regulations." And, despite a post-Great Recession bump, entrepreneurship continues a long-term slide, with Americans starting fewer businesses than in the past. "The firm entry rate—or firms less than one year old as a share of all firms—fell by nearly half in the thirty-plus years between 1978 and 2011," the Brookings Institution warned in 2014.

"Proposed changes to the Department of Labor's overtime rule would do little for small business employees while making it harder and more expensive for small business owners to run their company," the National Federation of Independent Business cautioned in vain before the rule was finalized.

Overtime rules that reduce worker and employer flexibility, and pose a specific threat to the start-up practices preferred by the dynamic tech sector, seem almost designed to make sure that there will be few jobs and less prosperity to go around in the years to come.

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  1. you could start throwing “privilege” back in the faces of minimum wage crusaders, cuz anyone who supports that has pretty obviously never had an hourly job.

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  2. The good news is that we have government bureaucrats who can, in effect, pass laws without the cumbersome process of getting our elected representatives involved.

    The bad news is that meddling in the economy will result in hardship for workers. If only there were real world examples of the catastrophic results that occur when countries’ governments try to micro-manage their economies.

    1. If only there were real world examples of the catastrophic results that occur when countries’ governments try to micro-manage their economies.

      Do you want a real-world example that is happening elsewhere right now, or a real-world example that happened right here in the past? Because we’ve got both.

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  3. Economically, this may not make sense. But morally, socially, and politically it makes every sense because it binds the community together to make sure parents can take care of their kids.

    Or some such.

    1. That doesn’t make sense.

    2. Dude, when you’re quoting Jerry Brown directly, you should attribute.

        1. +1 Linda Rondstadt

      1. Seriously. Even idiots deserve this basic level of respect.

  4. This regulation is, indeed, a really bad idea, but it’s unlikely to have any effect on tech startups. Even people taking a lot of equity in place of compensation are getting more than $47K in salary (which would be a slave wage for a Silicon Valley developer).

  5. It’s funny how that wage number isn’t tied to local cost of living or anything. It’s as if they think $47,476 goes just as far on Manhattan Island as it goes in the Louisiana Bayou. They can’t be that dumb, though, can they?

    1. Also, I love the newspeak employed on this government website. One of the graphics shows how many workers in each state will be “protected” by the new rules. No mention that what these workers are being “protected” from is freedom to associate.

    2. They sure are that dumb. I asked Jon Corzine a similar question once when he was running for Senator, vagaries and dissembling followed.

    3. They are not necessarily dumb. They just don’t care.

    4. Actually the number is actually based on something (my wife has to implement this rule at our university, so I’ve heard a lot about it, and how it will wreak havoc with postdocs, who normally don’t use a time clock and will have to start…)

      Here’s the official description of where that number came from:

      The Labor Department’s new threshold for exempt workers is $913 per week, or $47,476 annually, for a full-year worker. The Labor Department set the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region, the South. ( http://abcnews.go.com/Business…..d=39193676 )

      In other words it didn’t come out of thin air. The calculation came out of thin air (or perhaps some other location…). FWIW. Which isn’t much…

      1. I was thinking that they picked a number ending in “76” for the patriotic “spirit of” it. And duplicated the first two digits to make it easy to remember. No, they don’t have that much imagination.

    5. They can’t be that dumb, though, can they?

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  6. I was hoping the regulatory state and the power we have given bureaucrats would become a general election campaign issue. It would have if Cruz or Paul was the nominee.

    1. I’m somewhat surprised the GOP hasn’t made the bureaucratic regulatory can-kicking in Democratcare a talking point.

      But something Stupid Party something.

  7. Another ‘solution’ is to change employee’s status from hourly to salary which in many states means no overtime pay at all.

    1. the federal overtime rule applies to anyone in the pay bracket, even if ‘classified’ as salaried.

      1. Is this new? I’ve been retired for several years, but I certainly didn’t get overtime when I was salaried.

        1. Did you make more than $24,000?

          1. Oh yeah. But I get your point, now.

  8. Free ponies for everybody!

    Today, the Department of Labor issued a new rule that updates the regulations determining which white-collar, salaried employees are entitled to the Fair Labor Standards Act’s minimum wage and overtime pay protections. The rule increases the salary threshold below which most white-collar, salaried workers are entitled to overtime from the current $455 per week (or $23,660 for a full-year worker) to $913 per week (or $47,476 for a full-year worker).

    The updates will impact 4.2 million workers who will either gain new overtime protections or get a raise to the new salary threshold. So who are these workers?

    More than half ? 56 percent ? are women, which translates into 2.4 million women either gaining overtime protections or getting a raise to the new threshold as a result of the rule.

    1. “More than half ? 56 percent ? are women, which translates into 2.4 million women either gaining overtime protections or getting a raise to the new threshold as a result of the rule.”

      Or losing their OT and/or jobs.

      1. The assumption that everyone will benefit assumes there is unlimited money to give to these folks.

        What’s going to happen is that

        (a) Some, probably not that many, will get more money.

        (b) Some, probably only a few, will lose their jobs.

        (c) These jobs will turn into dead ends. The employees will be prohibited from working OT and many will probably be reclassed as hourly. HAving a salaried job rather than an hourly job, and the ability to put in some extra time, lay the foundation for a better job, but that will go away.

        If this is a net benefit to the people in that group, I will be surprised.

      2. What did you think “overtime protections” meant if not “protection from working overtime”? These idiots know nothing about running a business or needing to make payroll and still have something left over for yourself, they really do believe businesses can just raise their prices however much they need to to cover whatever costs they’ve got. And if they can’t? Well, you’re just a shitty businessman if you can’t figure out how to make a profit no matter what your costs are. And why do we need shitty businessmen running shitty businesses? We’re better off without them. It’s the same thing with the minimum wage laws – the only jobs that are going to be lost are shitty minimum wage jobs and aren’t we better off without them?

        Last Sunday the paper had a headline about the good news of so many more people being protected from having to work uncompensated overtime and the lady there at the BP started bitching about the rules. She’s an assistant manager, which doesn’t give her much more pay but does give her the responsibility of working a longer shift that overlaps the overnight guy and the afternoon guy so she can take care of the bookkeeping, banking, inventory stuff, plus if somebody doesn’t show up for their shift she has to find somebody to work or fill in herself. With the new rules, she’s not getting a pay bump, she’s just going to be ordered to get the same amount of work done in less time. They just made her job harder, not better paid.

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  10. A likely response to this new overtime rule:

    Salaried positions paying less than $47,700 per year will be phased out, and the people who held them will be out of work. The work they performed will be reassigned to the salaried employees making more than $47,700 Per year. Remember, they have no limit on their work week. Their employers will compensate them for the additional work by throwing them some additional money, which will cost less than paying overtime to the people in the positions that had been phased out.

    The final result? Highly paid employees will be paid even more. Businesses will be just as productive with fewer employees, which means more profit for their owners. And the employees who were supposed to be getting a fair day’s pay for a fair day’s work will end up getting no pay because they have no work.

    But then we will start hearing about the shocking increase in economic inequality…

    1. People said the Obamacare hour rule would result in a massive decrease in hours worked. As Usual, the right was wrong

      1. The employer mayday hasn’t kicked in yet you ignorant buffoon.

        1. *mandate

          1. Mayday kinda works, too.

      2. Apparently the left thinks the same thing will happen, since the Administration endowed themselves with the magical power to stop the employer mandate from taking effect.

  11. The goal, say the feds, is to “spread employment by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours” and “to reduce overwork and its detrimental effect on the health and well-being of workers.”

    Exactly. Basically, the government is taking upon itself to impose a limit to the number of hours these employees can work, beyond which they expect the work to be distributed to another worker.

    So, if you’re hourly, and you’d like to work 60 hours a week to make more money, then, tough luck. You’re supposed to have more off time and weekends, whether you want to, or not.

    This is the stated goal of such policies, which is why “Do you like over time? Then, thank the labor movement!” makes no sense. It should be “Do you like arbitrary limits on how much of your time you can convert into money (i.e., the situation of most poor people)? Then, thank the labor movement!”

    Gee, thanks.

    1. To your point: what the limits on work weeks encourages is second jobs, because it is cheaper to hire a part timer than to pay overtime. And if the part timer works less than 30 hours a week there is no requirement that the employee receive health insurance under Obamacare.

      And the problem with second jobs is this: people who already have jobs are still working as hard as they did before, only for two separate employers. And the people who had no jobs still have no jobs. Employment is not spread, and there is no relief from “overwork.”

      1. I always thought it was easier to just work one job frequently, than multiple jobs.

        It was easier to sell, “Hire me. Got 40 hours of work? Great. Need 60? I like money. Let’s make it happen.”

        Rather than finding the second job:

        “Hi. I’m already working 40 hours over here. Got 5-20 hours of work you need? I can do that. Any more and I might have problems sleeping…”

        It just adds hoops for people to jump through, changing little else. Progress!

  12. I hate the argument that businesses will go around it so why do it- the whole point, like minimum wage or the 40 hour week is to establish baselines. Same with speed limits. Sure people are gonna do 75 in a 65 but it’s far better than 100mph unchecked or more.

    Time to stop cowtowing to businesses simply because they’ll try to find ways around it, etc. This should help more than it’ll hurt just like previous regulations listed above have. Otherwise, fuck it, let’s just all work in sweatshops. At least they’re doing something to try to help combat the fact we’re more productive than ever yet make less and work more.

    1. Yes, we under stand that proggy cryptofascists hate economic reality and facts.

      Tell me, though, just how are we supposed to prevent businesses from responding to the incentives put in front of them by the government?

      1. The same economic “facts” that say raising the minimum wage will put us in a death spiral? Simply put, half the economists out there have no freaking clue. They say one thing, things go another way, etc. And honestly, I can’t blame them as it’s entirely difficult to lay down absolutes when you deal with something inherently not absolute- ie. people.

        1. I’m not talking about economists.

          I’m talking about the incentives created by regulations, and how businesses will (predictably) respond to them.

          it’s entirely difficult to lay down absolutes when you deal with something inherently not absolute

          True. Which was pretty much my point, and makes me wonder, just what are you bitching about?

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  15. If the right wing knew anything about economics, America would rule the world. We are the only nation with no paid family leave, no vacation, no universal healthcare, etc. the right wing said this freedom would raise income and lower unemployment.

    It has not. America’s middle class income has been stagnant for decades and our unemployment is on a par with other advanced countries.

    The right has dogma, but few facts to back up its relentless war on the middle class

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  22. J.D. do you mean that our Federal Government doesn’t know exactly what is best for us? (note sarcasm). Your article was a refreshing voice regarding the other side of the new Federal overtime laws. Many don’t stop to consider that businesses respond to supply and demand. If the desired skill or job is a high demand, low supply job, the employer is willing to pay a premium for those services. Swipeclock provides timekeeping solutions to small and medium sized businesses. We have seen a change in how many hours employers allow employees. Often full time employees are being scheduled for 35 hours so that there is a buffer between the employees hours and overtime hours. This has served to actually lower the wages of these employees. We are also seeing more businesses use contracted work for jobs that need to be done.

    Small businesses who often do bear the main burden of changes like these. Too many small businesses fail to last five years or more and those that do, can loose their profitability. This happens not only by paying overtime, but also by the costly expense of additional records to prove compliance, and the additional software and equipment to ensure compliance. All of these become a burden on profit margins that are already too thin.
    Although the Federal Government always has our best interests at heart, they do often fail to look at all aspects of the situation. Too often this means that those for whom the laws were intended to help bear the brunt of the results.

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