I wrote last week about President Obama’s decision to apply the time-and-a-half overtime rule to certain white-collar workers who are currently exempt. Based on the best empirical evidence, the new policy probably won’t raise wages or increase available jobs in the long run, as the White House would like to claim. Instead, employers will likely reduce their workers’ base wages (by means of cost-of-living increases that don’t keep up with inflation) to offset the new overtime premium. The end result: a higher administrative burden on employers with little benefit to workers.
The evidence is based on an oft-overlooked dynamic: Even in the absence of any overtime regulations, employers would be compelled by market forces to pay an overtime premium. That was the main insight gained by BLS economist Anthony Barkume when he analyzed the effect of overtime rules on wages. Like previous researchers, he found that, all else equal, jobs with overtime provisions paid lower base wages than jobs without overtime. But there was a puzzle: The observed reduction in base wages was only about 40 percent of what was needed to offset the added cost of time-and-a-half. How did employers deal with the rest of the cost?
Once Barkume understood that overtime laws added less than 50 cents per dollar to the cost of work over 40 hours a week, he realized that the lower base wage he was observing in overtime jobs offsets about 80 percent of the time-and-a-half bonus regulation adds rather than 40 percent. In other words, almost all of the cost of overtime rules gets absorbed in lower base pay.
There’s a broader lesson here about the government claiming credit for market processes. It’s not unusual to hear slogans like, “The weekend—brought to you by labor unions!” The implication is that we’d all be working six or seven days per week if not for union organizing and Labor Department regulations. Perhaps we’d also be putting in 12-hour days in perilous working conditions with no health insurance or pensions were it not for the efforts of Samuel Gompers or whomever. But the truth is that, as productivity increases, market forces improve pay and working conditions.