New overtime rules unlikely to help workers

By Aparna Mathur of AEI.

"President Obama’s proposed overtime legislation would affect nearly 5 million workers by increasing the salary level for exemption status to $50,440 per year from its current level of $23,660. However, evidence on the effects of such overtime provisions on workers suggests that the impacts are not likely to be beneficial.

These new regulations will impose incremental costs on employers by requiring them to make additional payments to workers that put in more than 40 hours per week. Employers can respond to these higher costs in several ways. First, they can cut the base or regular wage for workers who will likely receive these overtime payments. Second, they can cut existing workers’ hours and hire new workers who will also work fewer than 40 hours per week. Third, they can cut their hours or their jobs entirely and invest in a machine that can do the same job, perhaps more cheaply. Fourth, they can keep the workers but pass on the costs to consumers in the form of higher prices. Fifth, they can keep the workers, pay them the time and a half premium and bear the brunt of the higher costs.

Which of these scenarios is the most likely?

A recent study found that many firms, in response to 2004 regulation changes in overtime pay, lowered the base wage in jobs that often required overtime work in order to offset the new higher costs of overtime pay. In particular, workers in minimum wage or near-minimum wage jobs were given fewer overtime hours by their employers. This is likely because at that wage level, employers can no longer adjust wages downward so they are more likely to cut overtime use.

An earlier paper studied the impact of overtime regulations by comparing wholesale workers and retail workers between 1938 and 1950. The Fair Labor Standards Act of 1938 mandated time and a half overtime pay for wholesale workers, but not for retail workers. Using this difference in regulation, the author found that overtime mandates reduced the number of hours worked. Among workers in wholesale trade there was a 5 percent reduction in the length of the standard work week and 18 percent fewer men and women reported working more than 40 hours per week. The study also found that changes in hours depended upon whether the employers had flexibility to adjust regular wages. In the South, firms could not adjust wages as much due to minimum wage regulations, so Southern firms cut more hours compared to other regions. Finally, although the FLSA led to reductions in number of hours worked, it had little impact on levels of employment.

Not surprisingly, the Department of Labor’s own projections take into account how firms will likely respond to these new rules. Their report suggests that affected workers will see their base pay and hours reduced, but despite that they project that overall earnings will increase due to higher overtime pay rates. This latter assumption seems implausible in light of the research findings discussed above.

In today’s economy, determining what is overtime and what isn’t is not entirely straightforward. Some workers value flexibility to work on weekends and at odd hours, which employers can compensate through additional vacation days or higher bonuses. Imposing a rigid structure on the exact form of compensation or the nature of the employer-employee relationship is unlikely to be beneficial to workers or employers in the long-run.

I believe the most likely effect of this rule will be that firms reduce workers’ hours to avoid the threshold for having to pay higher overtime rates. As per today’s job report from the Bureau of Labor Statistics, we already have 6.5 million workers who are involuntarily working less than full-time because of poor economic conditions. The Affordable Care Act has created further incentives for firms to hire workers who work less than 30 hours in order to avoid paying for their health insurance. Unfortunately, it appears that this legislation will push us further in that direction with no obvious benefit and very tangible costs."