It’s Not Just Obama’s New Overtime Rules — OT Laws Don’t Really Explain Time-and-a-Half in the First Place

by Jason Richwine

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?

Because the time-and-a-half rule doesn’t really increase overtime wages by 50 cents for every dollar from what they would be otherwise. Since working overtime is generally undesirable, employers naturally need to pay an overtime premium to persuade workers to do it. If that premium is, say, 20 cents for every dollar, then having overtime laws apply to the job adds only 30 cents more to employer cost, not 50 cents. In fact, Barkume cited a study from the U.K. – where there is no time-and-a-half law – that found a market-driven overtime premium of 28 cents per dollar.

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.

This is not to say that all workplace regulations are therefore illegitimate, since labor advocates can always maintain that market forces are insufficient to achieve their goals. But giving government (or unions) all the credit for improvements in the life of the American worker is clearly wrong, and it gives regulators an inflated sense of power and importance. Perhaps as a result, we get lots of ineffective and pointless regulations – such as the president’s overtime policy.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.