Rescind Davis Bacon

By Alex Tabarrok. 

"The Davis-Bacon Act requires that workers on federally funded construction projects be paid at least the “prevailing wage” for their trade in the local area.

Mike Schmidt, Director of the CHIPS Program Office, has an excellent piece on how Davis-Bacon impacted the CHIPS program. My initial understanding was that it simply required paying construction workers more—an unnecessary transfer from taxpayers to a politically favored group, but not one that would impede efficiency. I was wrong.

Start with the complexity. Davis-Bacon’s prevailing wage isn’t a simple minimum wage: plumbers are not electricians are not fitters, and the required rate varies by locale. The Department of Labor maintains a list of more than 130,000 (!) wage rates to implement it.

That’s complicated enough. But it gets worse. Some firms building fabs used their own employees rather than contractors—and Davis-Bacon applies regardless but it covers only the portion of time an employee spends on “construction” work:

[A]pplying Davis-Bacon to company employees rather than contractors proved to be a big hurdle. Davis-Bacon required tracking every hour each employee spent on covered construction activities — by trade classification, with a different prevailing wage applying to each — and paying a wage differential for that portion of their work as distinct from fab operations work or non-Davis-Bacon construction work. The company also relied heavily on profit-sharing (where a portion of employees’ pay was tied to the firm’s profits) and Davis-Bacon’s guaranteed wage floor was difficult to reconcile with a pay structure that was inherently variable. Moreover, Davis-Bacon has a statutory requirement to pay wages weekly, meaning the company would need to change its payroll systems for a portion of the pay for a portion of its workforce.

Thus, DB required that two salaried employee with equal salaries and profit-sharing plans be paid differentially depending on whether one of them did “construction” work. This created internal strife.

Davis-Bacon was passed in 1931, when a carpenter was a carpenter. How does it apply to building a semiconductor factory?

The construction tasks involved in building and modernizing semiconductor fabs don’t always map cleanly onto DOL’s Davis-Bacon classifications, so applicants must go through a construction plan line-by-line to determine which rate applies to which activity. In traditional Davis-Bacon contexts this is less burdensome because contractors know the system and have processes in place. But semiconductor construction was a novel application, and all of our applicants — and most of their contractors — were navigating Davis-Bacon for the first time.

For large recipients, the administrative cost of this work was real but manageable relative to project scale: they could hire consultants, procure software systems, and build internal compliance capacity….

Perhaps the biggest fiasco involved timing. The government wanted firms to move quickly and encouraged them to break ground before the Act’s rules were finalized. But when Davis-Bacon was added to the Act it required that the firms pay the prevailing wage *retroactively*:

The financial and operational implications of retroactive application were significant. A leading-edge project might have 10,000–12,000 construction workers on site at peak, with a rotating workforce totaling perhaps 30,000 individuals over the project’s life. Working through 300-plus subcontractors across multiple tiers, retroactive application could require identifying wages paid to 20,000 workers who had already cycled off the project, determining what each worker should have been paid under Davis-Bacon, and paying the difference — resulting in hundreds of millions of dollars in additional cost.

The retroactive pay exposes the law’s true nature. Firms and workers had already struck voluntary agreements; the work was done, the wages paid. No one can pretend this has anything to do with incentives. Workers received a pure windfall (“DB Christmas!”) for one reason only: “construction workers” are a politically favored class. Janitors and scientists got nothing extra.

Moreover, a large fraction of the cost wasn’t the higher wages at all—it was compliance. Firms likely spent as much reworking payroll systems and hunting down thousands of former workers in this Byzantine classification system as they spent on the wage premiums themselves. Every dollar transferred to workers may have cost firms—and ultimately taxpayers—two dollars or more. A very leaky bucket indeed.

If the Trump administration is serious about cutting regulatory costs and reviving industrial competitiveness, Davis-Bacon is an obvious target. It delivers little to workers, plenty to lawyers and consultants, and a bill to taxpayers for both. Rescind it."

More Labor Market Margins of Adjustment

By Ryan Bourne of Cato.

"Many people worry about the existence of labor market outcomes such as low pay, the absence of business family leave policies, or gender pay gaps. A typical response is to demand the government pass laws to ban these outcomes, or else to mandate business practices that avoid them. This is thought to help the affected workers.

In a recent Cato book chapter, I explained that things rarely work out so simply. Profit‐​making businesses find new ways to make up for higher labor costs or the diminished flexibility imposed upon them as new mandates are passed down. Some cut employment or hiring levels. But recent economic research finds a host of other “margins of adjustment” firms use to maintain their profitability when costly regulations are applied. These include developing novel forms of contract, tinkering with worker schedules, or altering other parts of employees’ remuneration packages to maintain the businesses’ profitability.

Here’s two clear examples from this past week alone.

Noncompetes and minimum wages

The Federal Trade Commission proposes to ban noncompete clauses in most labor contracts. A noncompete agreement precludes a worker from being employed by a rival firm, usually within a certain geographic region and for a period of time after the employee leaves her current employer.

The impetus for this ban, per President Biden, is a proliferation of these contracts beyond the high‐​paid executives and scientists who might take valuable company knowledge to rival firms. Biden claims “one in five workers without a college education is subject to non‐​compete agreements. They’re construction workers, hotel workers, disproportionately women and women of color.” By banning this type of contract, the FTC hopes low‐​paid workers will be able to access more job opportunities, increasing their options and pay.

But what if noncompetes are a response to existing government policies? Economists Michael Lipsitz and Matthew Johnson conclude that “firms that would otherwise not use NCAs [noncompetes] are induced to use one in the presence of frictions to adjusting wages downward.”

In simpler terms: their research finds that increases in minimum wages cause greater noncompete use, perhaps because a higher wage floor raises the risk of hiring an employee whose initial productivity might not justify that pay rate. The idea is that a noncompete acts as a lock‐​in device to ensure it’s worth investing in the employee. If such clauses are banned, the affected firm risks training up an initially unprofitable employee, only for her to leave just as she begins contributing positively to the business’s bottom‐​line.

Using a new survey of salon owners, Lipsitz and Johnson find that minimum wage increases bolster noncompete use and that “minimum wage increases have a negative effect on employment only where NCAs [noncompetes] are unenforceable.” Noncompetes for some low wage workers look very much like a way to manage the extra costs of a higher wage floor.

This is just one of the many ways firms might react, other than layoffs, to higher minimum wage costs. Others include: cutting workers’ hours, changing schedules, imposing more rigorous work targets, or trimming other forms of employee remuneration and benefits. Economist Jeff Clemens’ excellent Journal of Economic Perspectives article reviews the academic literature on these adjustments. Clearly, a lot of these responses have harmful effects on certain workers.

Overtime laws

Employees covered under the federal Fair Labor Standards Act, which goes back to 1938, must receive 1.5 times their regular pay for any hours worked over 40 hours per week. Numerous exemptions to this federal requirement exist, including for salaried workers who have “executive, administrative, or professional” duties with an annual base salary of more than $684 per week.

A 2020 Institute for Labor Economics summary explained that because overtime regulations increase compliance costs for businesses and create financial constraints on how employers might operate cost‐​effectively, they can reduce net employment and hours worked. But new research finds that firms also often adjust by engaging in “title inflation” — giving workers managerial job titles that notionally grant them more executive, administrative, or professional duties, such that they are considered exempt from the law.

In a new working paper this week, economists Lauren Cohen, Umit Gurum and N. Bugra Ozel examine whether firms strategically assign titles to avoid paying overtime. The answer? Yes. Examining outcomes when the wage threshold for exemptions was $455 per week, they find evidence of a 485 percent increase in the usage of managerial titles for salaried employees after this threshold is crossed (see chart). This includes calling a front desk attendant “Director of First Impressions,” a reception clerk a “Lead Reservationist,” a food cart attendant a “Food Cart Manager” and a host a “Guest Experience Leader.”

More detailed regression analysis in their paper finds such a spike in titles does not occur at other wage thresholds or for non‐​salaried workers who are ineligible for exemptions. It also only occurs in states where the federal threshold applies (some states have higher thresholds).

The economists conclude that “firms strategically use job titles to exploit regulatory thresholds to avoid paying for overtime work.” If there’s no genuine change in duties, then eligibility for exemptions should not, technically, be granted. But almost all jobs have a range of duties — allowing firms to exploit ways to avoid the costs of the regulation.

Next time someone advocates a new labor law or a tightening of some mandate and simply asserts this will benefit workers, it’s worth pondering where the businesses maintain the flexibility for offsetting adjustments to protect their profitability. A good economist must see these unseen effects. And the more that mandates accumulate to prevent these adjustments, the more likely that labor market rules will lead directly to less employment.

For more on labor market regulation, see here. For more on the economics of the minimum wage, see here."

What’s the Point of the Overtime Pay Regulation?

By Ryan Bourne of Cato.

"The Trump administration will reportedly raise the overtime pay salary threshold from $23,660 to $36,000 in the coming weeks. Anyone below the current threshold is eligible to be paid at least one-and-a-half times their regular wage for any hours worked above 40 per week. The proposed change would make approximately 1.3 million extra people eligible for overtime pay.

Economically, such a regulatory change is a great big nothing burger. It will do nothing to affect long-term overall compensation, but will bring mild labor market dysfunction and adjustment costs along the way.

Yes, in the short-run, employers have business practices and contracts with their employees that take time to change. Some workers will therefore benefit from higher total compensation in the immediate aftermath of the rule change, as employers are now legally obliged to pay them extra for overtime. This, no doubt, will be the outcome the Trump team trumpets.

But as time goes by, employers will adjust.

That might come initially through managing their workforce to minimize the likelihood of paying overtime rates - changing shifts patterns, recategorizing workers into exempt categories, outsourcing tasks, or trimming the workforce. Basic economics tells us, though, that what employers ultimately care about are the total costs of employment. In time, the overwhelming response will be employers cutting base pay rates or other perks and benefits (relative to where they would have gone) such that overall employment costs remain unchanged. This is exactly the response that empirical research has found.

So the broadened scope of the rule will do little for workers beyond the short-term. But we’d expect it to modestly reduce the efficiency of the economy in other ways. For example, more employers might decide to spend time tracking their employees’ hours closely, disallow “working from home,” or adjust contracts towards hourly wages that are less appropriate for the nature of their industries."

Time to Repeal Special Interest 'Prevailing Wage' Laws

By Trey Kovacs of CEI.

"President Donald Trump has plans for $1 trillion in infrastructure spending as part of his administration’s plan to create jobs and spur economic growth. Democrats in the Senate announced a similar proposal earlier this year. Whether either of these are smart plans for jumpstarting the economy is up for debate. If Congress does pass such an infrastructure plan, however, it is imperative to ensure the best rate of return for tax dollars spent on these projects. The only way to do that is to repeal or exempt such infrastructure projects from existing “prevailing wage” laws that needlessly shield labor unions from competition and raise the cost of taxpayer-funded construction.

Prevailing wage laws act as an arbitrary wage mandate on federal, state, and local government construction projects. Although the specifics of the laws vary, the effects are the same—raising the cost of government infrastructure.

Prevailing wage requirements jack up costs because they peg the wages for specific occupations to the union rate in the area (rather than the average wage), impose burdensome paperwork on employers, and stifle competition. Foremost, setting prevailing wages at the union rate is misguided as only 13.9 percent of construction workers are members of a union. Additionally, setting the prevailing wage equal to the union wage suppresses competition. By forcing all contractors to pay the same, labor costs are shielded from competitive pressures.

Despite inflating the cost of public construction and harming competition, new polling data from the union-backed Smart Cities Prevail finds that voters actually support prevailing wage on government projects.

Normally, however, if you want to find out what people think, you ask them using neutral language. In the Smart Cities Prevail poll, they give the respondent the for-and-against argument in one question. This is not the best way to poll if you are looking for an honest answer.

One poll question states:

They [prevailing wage laws] require contractors on any government funded construction projects—like a road, bridge, or school—to pay workers at least the local market rate for their job where the project is being built.

It is disingenuous to say “local market rate.” For example, at the federal level, prevailing wage laws are significantly above the average local rate. According to Beacon Hill Institute research:

We found that on average the [Davis-Bacon Act] prevailing wage is almost $4.43 per hour, or more than 22%, above the [Bureau of Labor Statistics] average wage when wages are weighted according to the number of workers in each trade and each metropolitan area.

There is little doubt that the poll is politically motivated in order to stem the tide of lawmakers reconsidering the wisdom of prevailing wage laws.

Here is what taxpayers and voters really need to know about prevailing wage laws. The added costs associated with prevailing wage rules are massive. In December 2016, the Congressional Budget Office (CBO) estimated that repealing such requirements in the Davis-Bacon Act could save taxpayers $13 billion on federal construction projects between 2018 and 2026.

State governments also face increased costs caused by prevailing wage laws. For example, in Wisconsin, a state looking at repealing its prevailing wage law, the state and local governments could have saved $300 million on construction costs if not for prevailing wage laws, according to a report from the Wisconsin Taxpayer Alliance. 

Other states have realized significant savings from repealing or exempting certain projects from prevailing wage laws. In Ohio, legislation exempted school districts from prevailing wage requirements. Ohio’s Legislative Service Commission examined the impact of the exemption and found savings of over 10 percent.

Ultimately, prevailing wage laws are special interest legislation that exclusively benefit labor unions, not the public good. The real question that needs to be asked of voters is whether lawmakers should demand a good rate of return for taxpayers on public works projects. If the answer is yes, then prevailing wage laws ought to be repealed."

Where Have All the Startups Gone? New Research from eBay and EIG

By Richard Morrison of CEI.

"Recently eBay’s public policy team here in Washington, D.C. presented a fascinating program on economic growth and new business startups. The presentations and panel discussion focused on two studies relating to the long-term decline in new business ventures and the geographic distribution of the business growth that we’ve seen over the last few post-recession economic recoveries.

The first study, The New Map of Growth and Recovery, published late last year by the Economic Innovation Group, highlighted the dramatic decline in new firms during the Great Recession and the unprecedentedly anemic recovery since. Moreover, most of the new firm growth we have seen has been geographically narrower than in the past – confined to a smaller number of counties representing a smaller share of the total U.S. population. From 2010 to 2014, only one-quarter of all counties added new businesses at the same rate as the national economy and a mere 20 counties accounted for half of all new business establishments.



The second study, piggybacking on the first, was published this month by eBay’s Public Policy Lab. When the eBay team looked at their own proprietary data on the company’s users with more than $10,000 in annual sales, they found “a significantly more geographically inclusive spread of new enterprise formation on eBay compared to the brick and mortar economy as reported by EIG.”

According to Platform-Enabled Small Businesses and the Geography of Recovery, there seems to be something about an online business platform like eBay that makes it easier for small businesspeople to start and maintain a business, particularly outside of the most prosperous American counties.

According to John Lettieri of EIG, the prosperous areas that are dominating the recovery generally have high levels of immigration, up to date infrastructure, easy access to capital, and are part of one or more large university communities. It’s difficult, and probably impossible in the short term, for an economically depressed community to try to replicate those conditions. An online business that allows entrepreneurs to have easy access to millions of potential customers, ship and receive internationally, and scale easily, however, helps balance the disadvantages of less-vibrant locales.

When it comes to leveraging these findings, EIG’s Lettieri and eBay’s Brian Bieron had several policy recommendations, both for individuals who are confronting the geographically asymmetrical recovery in general, as well as those looking to build a business on an online platform.

• Reform occupational licensing laws that keep people with valuable skills from moving between jurisdictions. The Institute for Justice and the Charles Koch Institute have been leaders in the fight for licensing reform.  
• Reduce regulatory and tax complexity for small businesspeople. New legislation in the 115^th Congress, like the Regulatory Accountability Act, would go a long way toward achieving this goal. Reforming the tax code’s treatment of so-called “pass-through” small businesses is also a promising option.
• Increase access to capital for small businesspeople. My colleague John Berlau has written extensively on recent legislation aimed at that goal, like the Jumpstart Our Business Startups (JOBS) Act and the Fix Crowdfunding Act.
• Oppose expanding state tax authority over online transactions, especially as envisioned by legislation like the (misnamed) Marketplace Fairness Act. My colleague Jessica Melugin has been making the case for years that an MFA-style approach is terrible policy, though its proponents still seem to be hoping for a miracle in Congress.

Beyond the immediate conclusions of their current study, the huge volume of user data that eBay is sitting on has the potential to produce all kinds of interesting findings in the future. Watch their Main Street site for updates on future research."

Court Blocks Overtime Rule

By Trey Kovacs of CEI.

"Labor Secretary Thomas Perez learned a harsh lesson this month. Public servants at federal agencies cannot allow their political preferences to guide their regulatory agenda. Rather, they must fulfill the mission of the agency as Congress intended.

The folks over at the Department of Labor  (DOL) do not seem to comprehend that. Once again, a court has issued an injunction against a DOL regulation. This time it was President Obama's signature overtime rule, finalized on May 23, 2016, which would more than double the salary threshold for overtime eligible employees from $23,660 to $ $47,892.

On November 22, 2016, Judge Amos Mazzant, Obama appointee Eastern Texas U.S. District Court, agreed with the argument of 21 state Attorneys General and issued a nationwide preliminary injunction against the DOL’s overtime rule.

The Fair Labor Standards Act grants the Labor Secretary authority to issue regulations that interpret which employees are exempt from overtime, but with limitations. Section 213(a)(1) of the FLSA states that “any employee employed in a bona fide executive, administrative, or professional capacity” is exempt from overtime pay requirements. Congress only gave the Secretary the power to define which employees are considered “executive, administrative, or professional” employees, not raise the salary threshold so high as to “categorically exclude” employees who perform the duties of an executive or professional.

So the question at hand for the court, “What constitutes an employee employed in an executive, administrative, or professional capacity?”

As the ruling discusses, the terms “executive, administrative, or professional” (EAP) all relate to an employee’s duties and functions, not a minimum salary level. Judge Mazzant concluded that Congress intended for employees who perform professional duties to be exempt from overtime requirements.
As Judge Mazzant states in the ruling:

While this explicit delegation would give the Department significant leeway to establish the types of duties that might qualify an employee for the exemption, nothing in the EAP exemption indicates that Congress intended the Department to define and delimit with respect to a minimum salary level.

Further, the DOL’s final rule clearly violates Congress’ intent by stating that any executive, administrative, or professional employee earning less than $913 per week “will not qualify for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities.”

Again, the Judge points out that by making the salary level the litmus test for whether an employee is exempt from overtime pay, the DOL “exceeds its delegated authority and ignores Congress’s intent by raising the minimum salary level such that it supplants the duties test. … If Congress intended the salary requirement to supplant the duties test, then Congress, and not the Department, should make that change.”

This ruling throws a lifeline to small businesses, employees, state and local governments, non-profits and universities that would have suffered irreparable harm had the injunction not been granted."

These links explain the problem with the regulation

http://freemarketalternative.blogspot.com/2015/07/new-overtime-rules-unlikely-to-help.html

http://freemarketalternative.blogspot.com/2016/02/overtime-rule-is-threat-to-workers-and.html

http://freemarketalternative.blogspot.com/2016/09/obamas-overtime-rules-hurt-economy-and.html

http://freemarketalternative.blogspot.com/2016/06/new-ot-rules-hinder-21st-century-economy.html

Obama's Overtime Rules Hurt the Economy and American Workers

By Diana Furchtgott-Roth. Diana Furchtgott-Roth is a senior fellow and director of Economics21 at the Manhattan Institute. Excerpts:

"Twenty-one U.S. states filed suit on Sept. 20 to overturn the Obama administration’s new overtime rule, which requires employers to pay white-collar workers overtime if they earn less than $47,476 annually, instead of less than the current level of $23,660. (Manual workers generally have to be paid overtime at all earnings levels.) The rule is set to take effect Dec. 1."

"Consider what could be a real-life example: Peter, a fellow at a think tank who earns a salary of $45,000 a year. Now if he works late one night, he can come in later the following day, or take extra time off. He can duck out of the office to get a haircut without reporting to his boss. If he feels sick, he can ask to work from home. He can come home for dinner and catch up with his work in the evenings. His employer is free to say, “Peter, you worked a lot of evenings this week. Take some extra days off with your family over Thanksgiving.”

On Dec. 1, Peter and his employer will no longer be able to have such an arrangement. Along with others who make under $47,476 annually, Peter will have to keep track of his hours by clocking in and out. Because of his employer’s requirement to track his hours, telecommuting will be difficult. If he works longer in one particular week, his employer will not be legally allowed to give him “comp time” (time off instead of the extra hours), but will have to pay him overtime instead.

And for all that paperwork, Peter won’t necessarily earn more than what he is making now. His employer might tell him to make sure he never works more than 40 hours in a week. Or, since he makes more than minimum wage, his boss could lower his hourly pay rate to make up for the extra hours worked.

Even the Labor Department admits that most workers affected by the rule will never get the chance to work over 40 hours per week. The administration estimates that about 4.2 million workers would qualify for overtime in 2017, and they would earn $1.2 billion more in overtime payments.

In contrast, setting up the system for monitoring the employees could cost almost $20 billion in the first year because of the additional administrative costs.

One cost is familiarization, the time and effort that each employer must expend to understand the requirements and assess what needs to be done. Most employers reading this now have no idea that they will have to put in place different systems to track employees on Dec. 1.

Another cost is identifying each employee affected by the higher salary test, to decide for each case whether to raise their salary to the new threshold or to convert the status to non-exempt hourly. Converting salaried employees to hourly employees requires deciding what base hourly rate the employee earns. Plus, employers have to decide on a weekly hours requirement and policies to set for assignment and approval of overtime hours.

A third cost is management. Someone has to supervise the employees to make sure they fill in the time sheets and don’t work more hours than they are supposed to work — and pay them for extra hours worked.

The costs of the new rule could total $18.9 billion the first year — over 15 times greater than the $1.2 billion of increased wages that the administration estimates will be received by workers. In subsequent years, the ongoing management supervision costs imposed by the rule could total around $3.4 billion each year.

President Obama’s overtime rule would hurt those whom it is trying to help, by reducing flexibility in the workplace and discouraging job creation. The lawsuits are a common-sense reaction to harmful federal overreach."

For Affordable Housing, Ditch Prevailing Wage Laws

By Ivan Osorio of CEI.

"For residents of some of the nation’s major cities, it’s hardly news that housing costs are high, with little likelihood of their coming down any time soon.

However, in two of the country’s largest states, construction unions are highlighting a possible solution, albeit unintentionally, by their opposition to affordable housing – if the projects don’t pay union wages. As The Wall Street Journal reports:

In California last week, legislators and interest groups declared dead a measure pushed by Gov. Jerry Brown to allow certain apartments with some low-income units to sidestep the state’s environmental review process. That followed a failed effort by state lawmakers in New York earlier this year to renew a widely used tax break for rental housing in New York City; now lawmakers there are straining to reach an accord to revive it.

For both measures, construction unions were key to the defeat, as they won over key allies with their argument that the government shouldn’t be aiding apartment development without also guaranteeing union-level wages. Unions, particularly in New York, have been facing a gradual erosion of their market share on residential developments, and now developers that a generation ago would have been union shops are able to fill jobs with nonunion workers, which can lower construction costs by an estimated 20%, according to New York-based Citizens Housing and Planning Council, a low-income housing group.

Of course, New York City’s and San Francisco’s high real estate prices are due in large part to those cities’ vibrant economies, but state and local governments guaranteeing union wages only makes the provision of affordable housing more difficult.

Prevailing wage laws are also anti-competitive, as they give a leg up to union contractors by barring their nonunion competitors from bidding below a de fact cost floor. Thus, other states should follow the example of West Virginia, which repealed its prevailing wage law last February.

And it’s not just at the state level. The federal prevailing wage law, the Davis-Bacon Act, routinely increases costs on federally funded construction projects. Its repeal is long overdue."

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."

Steve Landsburg on how Hilary Clinton, wants to force you into a profit sharing arrangement

See Clintonomics.

"Are you a corporate employee who wishes that your income were tied more closely to your employer’s profits?

I have good news for you: There’s an easy way to make that happen. Take 10% (or 5% or 20%) of your wages, and use them to buy corporate stock.

Are you a corporate employee who *doesn’t* wish that your income were tied more closely to your employer’s profits?

I have good news for you, too. You don’t have to buy additional stock if you don’t want to.

Hilary Clinton, however, wants to change all that. She wants to force you into a profit sharing arrangement that is, for all practical purposes, equivalent to forcibly converting part of your salary into corporate stock. If you were planning to do that anyway, this will make no difference to you. If you weren’t planning to do it anyway — if, for example, you preferred to diversify your risks by investing your wages in some other industry — then, of course, this will make you worse off.

(I trust that none of my regular readers is silly enough to respond that Clinton’s plan is much better than buying stock, because you get the profit-sharing in addition to your existing salary. But for the benefit of the occasional drive-by reader, this is not possible. Market pressures insure that your total compensation is equal to the value of what you produce for the company, and if one facet of that compensation goes up, then another must go down.)

I have the impression that Clinton supporters like to tout her credentials as a true policy wonk. But the first rule of wonkism is that before you start dictating changes in voluntary chosen arrangements, you’ve got to identify a market failure that you’re trying to alleviate. In this case, what is that market failure? As far as I’ve been able to determine, Clinton has not even attempted to address that question. This is not policy analysis; it is a declaration or contempt even for the possibility of a thoughtful analysis. Don’t we already have enough of that on the other side."

New O.T. Rules Hinder 21st Century Economy

By Liya Palagashvili of Mercatus.

"Sen. Elizabeth Warren, D-Mass., recently released a report that provides a number of narratives from individuals, mostly in retail, about their experiences working long hours without overtime wages. I commend Sen. Warren for supplying this report and giving us perspective about these issues that exist mostly in retail.

Yet the Department of Labor’s new overtime regulations may not provide an appropriate answer to the senator’s anecdotes.

The new federal overtime regulations mandate that employers track the hours worked by their personnel and pay them time-and-a-half for every hour worked over 40 hours per week. There are a number of exemptions to this regulation, and one of them is the employee’s salary.

Currently, employees making more than $23,660 a year are exempt from overtime regulations. A new DOL rule increases that threshold to $47,476, such that all employees in this salary range, regardless of the industry – unless, that is, specific roles and industries become exempt – will now have to keep track of their hours and be paid overtime wages when they work beyond 40 hours per week.

The problem with this regulation is that the DOL didn’t analyze how it will impact various U.S. industries. It noticed one problem in retail (specifically with shift managers) and assumed this is a problem for every industry. The DOL made no effort to understand how the nature of work may be different in tech startups or higher education than in your typical manufacturing company or retail store.

The DOL made no effort to understand that, in some industries and for some roles, it doesn’t make any sense to pay by the hour anymore. Forcing employers to reclassify millions of workers from salary to hourly drags the nature of our 21st century jobs back into the 20th century.

Why were the stories of young entrepreneurs not included in Sen. Warren’s or the DOL’s reports? Most startups don’t have a strong revenue stream, and some are even prerevenue for the first few years. Their margins are very tight, and that’s one of the reasons they pay employees in equity instead of cash wages. Adding even minuscule costs to their operations will hamper them early on.

But if the senator or the DOL had surveyed the tech community, they wouldn’t receive stories similar to what they found in retail regarding abuse of employees. Individuals working at tech startups and nonprofits are working there to advance a vision they believe in. For many roles in tech startups, the model of paying “by the hour” is outdated and oversimplified.

The DOL analysis didn’t consider how these overtime regulations would impact other factors of jobs in an information economy, either. Its analysis looks backward. Will employers limit telecommuting if workers are reclassified into hourly, and their work must now be tracked? If employees check email outside of business hours, does that count as work? The DOL needs to analyze how this regulation will impact today’s world in light of factors that many genuinely care about (e.g., telecommuting, worker flexibility).

The truth is, there is a solution out there that would help vulnerable individuals and not also punish small businesses, nonprofits, institutions of higher education, young entrepreneurs and tech startups, among many other groups. But in order to find that solution, we need to have an open and thorough discussion about both the costs and benefits of this policy and the people it will effect.

What would be better for society is if we moved beyond selective anecdotes – which may be atypical of current and future labor markets – and consider how our economy is evolving, based on more comprehensive evidence. Before we regulate, we should understand what it is that we are regulating."

Productivity and Pay: Do Workers Enjoy the Fruits of their Labor?

From The Heritage Foundation.

"Do workers enjoy the fruits of their labor? Economic theory predicts that firms pay workers according to their productivity. Some analysts argue this no longer happens in the United States. They contend that workers’ pay has stagnated for the past generation despite large increases in productivity. This belief drives much of the Obama Administration’s regulatory agenda. Labor Secretary Tom Perez explains the newly released salaried overtime regulations are intended ensure that “as we have productivity and profitability in this country, that is shared between business and workers.”

New research from The Heritage Foundation finds that is already happening. Since 1973 average hourly labor productivity has grown 81 percent. Over the same period employees’ average hourly compensation has grown 78 percent. Employee pay closely tracks productivity growth. The studies finding otherwise compare the productivity and pay of different groups of workers, adjust pay and productivity for inflation differently, and contain mathematical errors. These factors cause the apparent gap between pay and productivity reported."

White House Supports Bill that Exempts Puerto Rico from New Overtime Regulation

By Trey Kovacs of CEI.

"Progressives praised the Department of Labor’s new overtime rule as a way to fatten workers’ pockets and a means to strengthen the middle class. If the overtime rule is such a boon to workers, why did Democrats in Congress and the White House agree to a deal, which allows Puerto Rico to restructure its enormous debt, but also exempts Puerto Rican workers and employers from the new overtime requirements?

It is likely because they understand that the overtime rule is unlikely to raise most workers’ wages and undoubtedly burdens job creators. Furthermore, the primary policy objectives in the DOL rule do not mention pay raises as a goal. The purpose of the rule, according to the DOL, is to reduce involuntary unemployment by making work over 40 hours more expensive and to cut back on overwork to protect employee health and safety.

They probably realized with unemployment in Puerto Rico at 11.8 percent in March that making any kind of labor more expensive or burdening employers with greater administrative costs is not going to help.

Employers in the United States have already expressed concerns about the rule that was only finalized this week. The New York Times reports on small businesses concerns and adjustments they will make in the light of the overtime rule. Lior Rachmany, founder of Dumbo Moving & Storage, tells the Times that he would consider “hiring freelancers and independent contractors” to avoid paying overtime during busy seasons. This is a clear unintended consequence, since the DOL recently issued guidance, which intent is limit the proliferation of freelance and independent contractor use.

The tech startup community has been outspoken on the challenges the overtime rule imposes on them. Dan Gelerenter, CEO at Dittach, LLC, a tech startup that improves email searches for attachments, penned a letter to the Senate Committee on Small Business and Entrepreneurship laying out the obstacles the rule places on tech startups that start off with no or very little funds. Gelerenter cites cumulative cost of regulation that larger companies may be able to “cope with,” but “startups do not.” Further, he views the rule as callous since even a modest increase in the cost of doing business may “put some of us out of business.”

It is not just tech startups that have very little room to navigate around government increasing costs of business. Retail and restaurants companies operate on extremely thin margins. Sageworks, a financial information company, finds “more than half of the 15 industries identified are within the retail sector.” Unsurprisingly, the National Retail Federation and National Restaurant Association have been some of the most outspoken critics of the new rule.

But the new overtime standard, which increases the salary threshold for overtime eligible employees to slightly over $47,000 from $23,660, is not just problematic to employers—employee career prospects are at risk.

As a Competitive Enterprise Institute coalition letter signed by 17 free-market organizations explained, “[B]y increasing the threshold, many workers will lose salaried employment status and the benefits they depend on, like flexible work arrangements and health benefits.”

Millions of workers potentially becoming hourly employees overnight is a terrifying prospect, even though some progressives understand the benefits of salaried careers as opposed to hourly jobs.
Dedrick Muhammad, senior director of the NAACP’s Economic Department, penned an article at The Huffington Post, citing that salaried employment is better in the long run for workers:

It’s also true that some hourly positions can pay more than salaried positions, either due to higher pay or compensation for extra hours. But depending on your long-term plans, a salaried job with benefits, even if it pays less than an hourly job, might ultimately put you in a position of greater financial strength. In other words, it’s not about what pays you more, but rather what gives you more.

President Obama frames the issue of overtime as “making sure you're paid fairly.” If he believed his own words, then why did he agree to a deal that, to him, ensures workers in Puerto Rico are paid unfairly?"

Krugman's Orwellian Language: Less Bargaining Power is More

From David Henderson of EconLog.

"The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers. What both stories tell us is that the Obama administration has done much more than most people realize to fight extreme economic inequality. That fight will continue if Hillary Clinton wins the election; it will go into sharp reverse if Mr. Trump wins.
Step back for a minute and ask, what can policy do to limit inequality? The answer is, it can operate on two fronts. It can engage in redistribution, taxing high incomes and aiding families with lower incomes. It can also engage in what is sometimes called "predistribution," strengthening the bargaining power of lower-paid workers and limiting the opportunities for a handful of people to make giant sums. In practice, governments that succeed in limiting inequality generally do both.

This is from Paul Krugman, "Obama's War on Inequality," New York Times, May 20. It is clear from the context that Krugman is claiming that the new Obama regulation on overtime pay is an example of "strengthening the bargaining power of lower-paid workers."

He's wrong. It does just the opposite.

Probably the best way to help him see the point, if, as I doubt, he wants to see the point, is to consider his situation with his employer, the City University of New York. Krugman is a salaried rather than an hourly worker. So he doesn't have to punch a clock and no one is keeping track of his hours. He can work on his lunch break if he wants, he can work on an airplane, he can work any time and anywhere.
I don't know the specifics of his deal with his employer, but of my above claims I am virtually certain.

Imagine that you are making between $40K and $45K, much less than Krugman's $225K. You are salaried. You don't want or need as much flexibility as Paul Krugman has, but you do want some flex. You want to be able to have an occasional long lunch hour some days and a short lunch hour other days. But this won't always works out to 40 hours a week. Some weeks you will work 38 hours, some 42 hours, some 45 hours, some 34 hours. You ask your employer for that flexibility and your employer answers, "Fine, as long as the work gets done. And, in return, there might be times, not often, but some times, when you need to come in on a Saturday morning."

You think about that. You respond, "OK, as long as I can take a few hours off in a day, when there's a lull, but I guarantee that the work will get done." Your employer and you agree.

Is there anything in this story that sounds implausible?

What just happened?

You exercised your bargaining power.

Now someone who doesn't know you from Adam comes along and says, "Your agreement with your employer means that some weeks you will work 45 hours. In the weeks that you earn 45 hours, the employer must pay you for 47.5 hours. (Overtime rules require that the employee be paid time and a half for any hours over 40 in a week.) You may think that those cancel out so that your average is 40 hours a week. Tough. We don't think the same way. Your deal is illegal. The employer must pay you overtime any week that you work more than 40 hours no matter what happens in the other weeks."

Now the employer has to rethink his earlier agreement. Paying overtime wasn't part of the plan. He can adjust by lowering your base pay so that some weeks you earn less than before and some weeks (the weeks with overtime) you earn more than before. And he must keep track of all these hours, whereas he didn't before. He reluctantly goes along and cuts your base pay.

The arrangement has been altered. You might not like that. You have rent to pay in the 4-bedroom house you share with 3 other single people and you like the certainty of that weekly income. But now the employer, in response to that regulation, has removed that certainty.

Your bargaining power is now less. QED.

Update: Question for extra credit.

Why do you think the Obama administration chose December 1 as the date for implementation?"

The High Cost of Obama’s Overtime Edict

By Walter Olson of Cato.

"The Obama administration this week announced final regulations doubling the salary threshold (from $23,660 to $47,476) at which most employers must pay time-and-a-half overtime to white-collar workers, and indexing future thresholds to advances in the wage level. Employees 25-34 and those with a bachelor’s degree are expected to be the most heavily affected groups; among sectors expected to be hard hit are not only retail chains, restaurants, and small businesses that hire on-site managers, but also colleges and even food co-ops. 

As colleague Jeffrey Miron observed in this space on Wednesday, the notional paycheck benefits to employees reassigned to hourly status are likely to prove temporary, since employers have many ways over the medium term of dodging a permanent upward jump in payroll costs: they can forbid employees to clock more than 40 hours a week, lay off those who regularly do so, cut back on non-cash perks for the salaried, and so forth, not to mention suppressing the level of base pay itself.

The final version slightly softens some of the worst features of last year’s proposal, knocking down the pay threshold a bit, allowing bonuses and commissions to count toward 10 percent of the sum, and dropping a scheme to expand the range of duties forbidden to salaried managers. But overall, it’s still impractical in the extreme - as House Democrats, of all people, discovered when they tried to comply with the spirit of the rules in their own offices. The result, as I noted in this space last month, turned out to be a series of headaches including the prospect of unanswered phones and other gaps in constituent service, layoffs, and even closure of some district offices.

Two years ago, when the administration announced its plans, I pointed out in this space that the proposal, part of President Obama’s “binge” of executive orders and unilateral decrees to bypass Congress, posed very large compliance costs, aside from giant class action payouts by employers unlucky enough to guess wrong about the law’s requirements. It would also “frustrate ambitious individuals who willingly tackle long hours to rise into management ranks.” Perhaps most significant, it would force millions of workers into time-clock or hour-tracking arrangements even if they themselves prefer the freedom and perks of salaried status. The hassles of this system, when stringently enforced by law, are major:

For years, some lawyers have been advising clients not to hand out company-paid cellphones to any workers who lack a lawful overtime exemption, lest a claim later be made that work was done on the phones during evenings and weekends. Where the law is particularly stringent about calculation of lunch breaks, as in California, some lawyers have advised employers to make it a firing offense to do any work during the allotted break.

Many workers will also lose the option of “comp time” arrangements, often valued as family-friendly, by which extra hours worked one week are offset by a paid day off in the next. Much more on the likely constriction of workplace flexibility is to be found in Donald Boudreaux and Liya Palagashvili’s recent Mercatus Center paper, which discusses the menace posed by the rules for the practice of telecommuting (which by its nature makes it hard to track work hours).

I’ve covered the regulations extensively over the past two years at Overlawyered, including the tactics (such as lowballing costs and fast-walking comment periods) by which the intensely ideologized Department of Labor of Thomas Perez has sought to evade scrutiny of the measure’s costs. Along the way,  I also noted that “one big if unstated aim” of the rules is one of ideological transformation of the American workforce itself: “with more people punching clocks at work, there’ll be fewer with the politically unproductive ‘management mentality’ of salaried types.”"

Obama's Overtime Rule Is Going to Be a Disaster for Startups

Dear Congress: Please Fix This!

By Dan Gelernter, writing at FEE. 

"The Hon David Vitter, Chairman

The Hon Jeanne Shaheen, Ranking Member
Senate Committee on Small Business and Entrepreneurship
428A Russell Senate Office Bldg
Washington, DC, 20510

Dear Madame and Sir,

I am co-founder and CEO of the technology startup company Dittach. Dittach is my second company. My first ultimately failed after two years of hard work, but I took the lessons learned and started again.
In Dittach’s first year of operation, we raised some $600k to build our software and our business, and we had to spend in excess $55k on legal costs — nearly ten percent of the total. The great majority of these costs were simply in satisfying the compliance burdens already imposed on us by local, state and federal regulations — to make sure that our company was formed according to the rules, that our contracts and stock issuance was in order, and so forth.

Having spent this money on legal fees has made a material difference in our ability to succeed. I could have used that money to hire another developer — if not for those compliance costs, together with the specter of additional costs and mandatory benefits that effectively penalize the company for each employee hired.

As a tech startup founder and employer, I think the Department of Labor’s newly proposed overtime regulations will do more harm than good for our industry. Larger companies may have a variety of ways to cope with the increased cost of this regulation, but startups do not.

In the early stages, we typically have no revenue at all. We’re building a vision or a product from scratch — it may be years of work before we make our first sale. Our money is extremely limited: We have only what we raised from investors, and fundraising is itself so difficult a process that most startups fail before they’ve raised any capital at all.

For those of us who raise money successfully, each dollar represents a piece of our company that we had to give away in exchange for it.

We have no way of passing increased costs to customers. Raising the cost of performing a task — either through raised wages or simply the increased cost of compliance with new rules — means we can do less. In a startup, where our margins are already so tight, where we enter this difficult and dangerous field knowing that the vast majority of us will fail, a small increase in operating cost — a fraction of a percent, even something that costs only a thousand dollars — can make us insolvent. It can mean that all the money and energy we spent up to that point was wasted. It can mean that instead of employing a half-dozen people we can now employ no one at all. It will be cold comfort to the newly unemployed to know that he would be earning more than before, if only he still had his job.
The difference between success and failure for a tech startup is a minute, and the judgment is exact and brutal.

We might be told that the answer for a startup is simply to “go and raise more money.” But — aside from diluting the founders who are paying for the company with their sweat in exchange for the hope of a payoff that comes in years, if ever — raising capital is the single most difficult thing I do as a startup entrepreneur. I would invite anyone not in our field to give it a shot before he endorses a regulation that will impose greater capital costs on us.

Regulators often act as though they cannot imagine a world where a few hundred or a few thousand dollars can make the difference between success and failure. If you raise our costs even modestly, you will put some of us out of business.

To increase our chance of success, I would recommend exempting newly formed companies from taxes and rules on wages for the first three years of a company’s existence. The few thousand dollars a company pays the government in early compliance is nothing compared to the jobs, tax revenues and benefits a business can produce when it reaches maturity.

Respectfully Yours,

Dan Gelerenter
CEO, Dittach, LLC"

Due to new California pay regulations, trucking companies are passing along these higher costs to customers in the form of higher prices

See Who’d a-Thunk It? from Don Boudreaux.

"Politicians elected to positions of power within the state of California fancy that their own assessments of what the details of labor contracts should be are more informed than, and superior to, the actual details that are worked out in markets.  So the arrogant and officious rulers in California have ordered trucking companies to raise their employees’ pay.  (Specifically, trucking companies operating in California must now pay truckers not an amount based only on the number of miles driven but, rather, also for the time the truckers spend fueling, eating, and doing some other non-driving activities.)

Guess what.  Trucking companies aren’t simply absorbing these higher labor costs.  Instead, trucking companies are passing along these higher costs to customers in the form of higher prices.  Higher prices, of course, will reduce over time the quantity demanded of shipping services from trucking companies – which will, in turn, reduce the demand for truck drivers.  Also, of course, consumers in California – as well as producers in California – will suffer from the resulting reduced supplies of consumer goods and of inputs.

Who’d a-thunk that arbitrary government alterations of labor contracts will lead to eventual harm to many of the workers that the government officials ostensibly want to help?"

Overtime Rule Is a Threat to Workers and Small Business

From Trey Kovacs of CEI.

"By statute, Congress delegated to the Secretary of Labor “the authority to define and delimit the terms of the [overtime] exemptions.” But that doesn’t mean it is good policy to dramatically modify the exemptions.

On June 30, 2015, the Department of Labor submitted a notice of proposed rulemaking to significantly modify the exemptions in the Fair Labor Standards Act’s overtime rules. Most notably, the proposed rule greatly increases the minimum salary threshold for exempt workers.

Currently, under the FLSA, overtime regulations require time-and-a-half pay for every hour above 40 that an hourly employee works in week. Workers may be exempt from overtime pay if they are salaried employees who perform executive, administrative, professional, and outside sales activities and make more than $23,660. The exemption targeted by the DOL’s proposed rule is the salary exemption threshold. The agency plans on raising the threshold 113 percent from $23,660 to $50,440.

Currently, the DOL is reviewing hundreds of thousands of comments and plans on finalizing the rule in the summer of 2016.

DOL officials claim that the proposed rule is intended to give workers a raise. Yet, a number of unintended consequences will arise if the rule is finalized and has little chance of giving workers a sizeable pay increase.

There is no doubt that the DOL rule change will increase the amount of employees eligible for overtime (estimated at 5 million workers), but unlike increases in the minimum wage, the government cannot force employers to pay employees more via the overtime rule, because employers can take steps to keep labor costs at relatively the same level, either by degrading salaried employees to hourly, hiring fewer employees, reducing base pay, or cutting back hours.

And these choices employers will have to make to keep labor costs constant will have a detrimental impact of the prospects of employees. For example, demoting junior managers to hourly workers may have devastating impact on those workers’ career trajectories. Once on a management track and gaining supervisory skills, now they are performing more basic tasks with less opportunity for advancement.

Another negative consequence comes from demoting low-level mangers—the loss of flexible schedules. As a salaried manager, if a child becomes sick or an emergency arises during work hours a manger is able to leave work to address the problem without loss of pay. An hourly employee loses that pay when absent from work.

Like workers, small business is in the crosshairs of the rule change. As reported on Market Watch:

An official at the U.S. Small Businesses Administration said the Department of Labor underestimated what its new overtime rules would cost small businesses. 

“There are a lot of unintended consequences,” said Janis Reyes, assistant chief counsel at the Small Businesses Administration’s advocacy office.

Small business owners may have to increase managers’ salaries, hire and train new part-time employees, and lower rent, among other changes, to avoid overtime costs, she said.

In addition, salaried employees could lose benefits such as health care by being forced to transition to hourly employee status, she said.

The DOL’s one-size-fits-all change to the minimum salary threshold also fails to take into account the vast difference in cost of living around the country. For example, in New York City the increase may not be devastating, but it could drive a small business owner in rural Arkansas out of business or result in layoffs.

Everyone can get behind the idea of helping workers who are struggling to get by. However, the proposed overtime rule does more harm than good, if any good at all. Imposing greater costs on businesses results in cuts somewhere, often by reducing wages or creating less jobs. As my colleague Wayne Crews often notes, “You don’t have to tell the grass to grow—you just need to take the rocks off of the grass.” The time has come for us to take the rocks off of the U.S. economy."

Obama’s Overtime “Protections” are No Such Thing

By Don Boudreaux. Excerpt:

"Here are two slices; as you read these, remember that the administration claims that, by mandating extra, overtime pay for the affected salaried workers, the employers of these workers will mainly work these workers fewer hours and hire other workers to perform the ‘overtime’ tasks previously performed by these affected workers:

The Obama administration’s chief way of helping American workers is to shrink their abilities to bargain with employers. It is to strip from workers their rights to offer things of value to employers in exchange for things of value from employers.

The minimum wage is an example: By denying workers the right to offer to work at hourly wages below the minimum of $7.25, the government robs workers who cannot produce that much value per hour of the right to bargain for jobs by offering to work at wages below $7.25.

Another example, announced this past summer, is the administration’s scheme to expand the number of workers who are prohibited from working more than 40 hours per week unless they are paid time-and-a-half for every hour they work above 40. Currently, salaried workers with supervisory roles who earn more than $23,660 annually can agree to employment contracts under which, if they work more than 40 hours weekly, they get paid nothing extra.

….

If employers, to avoid paying overtime wages to salaried workers, reduce the number of hours these employees work each year, the amount of annual output that these employees produce for their employers obviously falls. These workers become less valuable to their employers. Many employers — operating in highly competitive industries such as food retailing and lawn-and-garden care — will have no choice but to lay some of these salaried workers off or to reduce these workers’ salaries. Either way, bargains struck voluntarily between employers and employees are upended by heavy-handed regulation, making both employers and workers worse off."

Robert J. Samuelson Explains The Problems With Hillary Clinton's New Tax Proposal To Encourage Profit Sharing

See The trouble with Hillary Clinton’s profit-sharing plan. Excerpts:

"Her proposal seems simple. She would provide a 15 percent tax credit — that’s a direct tax cut — for profits that companies distribute to workers. On a $5,000 profit-sharing payment to a worker, a company would save $750 in taxes (that’s 15 percent of $5,000). The credit would phase out after two years, presumably after demonstrating its value. The Clinton campaign estimates the cost at about $20 billion over a decade.

“It’s a win-win,” argues Clinton.

Well, maybe not. Creating the tax break would pose huge practical problems, and the economic advantages of profit-sharing may be overstated.

Writing regulations wouldn’t be easy. One issue is what to do with firms that already offer profit-sharing. In 2014, about 36 percent of employees worked at firms that have some form of profit-sharing, reports sociologist Joseph Blasi of Rutgers University. This poses a dilemma. Tax policy often tries to avoid rewarding taxpayers for doing things they already do. But denying these companies a tax break would put them at a disadvantage with firms that get it. 

Another problem: Some companies would convert normal pay increases into profit-sharing to qualify for the tax break. This would save taxes, but workers wouldn’t benefit. The Clinton campaign pledges “to develop protections against [such] abuses.” More complex regulations. Similarly, the campaign says the tax credit “would phase out for higher-income workers.” How high? More regulations. The credit would also be capped for any one firm “to prevent an excessive credit for very large corporations.” More regulations.

All this would be nonproductive work — interpreting and manipulating rules. It would benefit tax lawyers and accountants. Whether their parasitic work would outweigh productivity gains from more profit-sharing is unclear.

The assumption is that these gains occur automatically. That’s not true, according to research by Blasi and economists Douglas Kruse of Rutgers and Richard Freeman of Harvard. They find that, for firms to become more productive, profit-sharing must occur in combination with other work practices: high levels of training, job security and on-the-job problem-solving. What matters is the whole package of practices. (In fairness: Blasi, Kruse and Freeman support Clinton’s proposal and think it should be broadened.)

We have a microcosm of tax policy: The gains of Clinton’s proposal are overstated, the costs understated. We’d be better off with fewer preferences and lower rates. Let firms and individuals decide what’s best for them. But politicians would have to stop using the tax code as an advertising agency and benefits bargain store. That’s a long shot."