Wednesday, July 13, 2016

Donald J. Boudreaux On How New Overtime Rules Will Hurt Workers

From the Pittsburgh Tribune-Review
"Starting Dec. 1, the Department of Labor will force businesses to pay millions of salaried workers time and a half for every hour over 40 that these workers work weekly. Great news for salaried workers, right? 

Wrong. The luckiest of these workers will experience no change in their pay or work hours while many less fortunate workers will be priced out of their jobs. 

Here's an example: Jones is a night manager at O'Burger's Restaurant. He works an average of 45 hours each week for a weekly salary of $750. Because the Labor Department calculates Jones' hourly rate of pay based on a 40- (not 45-) hour work week, it concludes that Jones' hourly rate of pay is $18.75 (which is $750 divided by 40). Under the new Labor rule, Jones must be paid time and half — $28.13 — for every hour each week that he works over 40. 

Therefore, if O'Burger's continues to work Jones 45 hours weekly, it will have to pay Jones each week, not $750, but $890.65. That's a 19 percent increase in O'Burger's cost of employing Jones for an average of 45 hours weekly. 

Unlike when Obama administration officials discuss minimum wages, these officials here correctly understand that government-enforced hikes in the cost of employing labor prompt employers to cut back on the use of now-more-costly labor. Specifically, Labor predicts that, in this example, O'Burger's will simply reduce Jones' weekly hours from 45 to 40 and hire an additional worker — at straight time — to perform the other five hours of work. 

Yet while Labor officials are correct that employers will take steps to avoid the higher costs of employing workers such as Jones, these officials are mistaken in their prediction of how employers will do so. 

The most obvious and easiest way that O'Burger's will protect itself from the higher mandated labor cost is to cut Jones' hourly rate of pay to $15.79. At this base rate, Jones will get paid a total of $750 weekly when he works a 45-hour week and is paid time-and-a-half for five of those hours. For Jones, nothing changes. 

Another possible way for O'Burger's to adjust to Labor's mandate is to cut the value of Jones' benefits — for example, offer Jones fewer days of paid vacation or contribute less to Jones' pension plan.
The government is naive to suppose that O'Burger's would instead simply reduce Jones' weekly hours to 40 and hire an additional worker for the other five hours. Because Jones has managerial duties, it's just not feasible to shut Jones down after 40 hours each week and to then have someone else do the managing for the remaining five hours. 

Not all workers will be as lucky as Jones. Because of the minimum wage, some workers' hourly pay rate — unlike Jones' — will be too low to cut in order to keep these workers' weekly pay unchanged. The effect of the overtime-pay mandate on these workers will be to raise employers' costs of employing them. With the cost of employing these workers forced higher by the government, some of these workers will simply lose their jobs. 

Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly."

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