Politics & Policy

Mandatory Overtime: Price-Fixing for Workers

Obama wants to expand overtime pay, but workers may lose more than they gain.

According to a report in Politico, the Obama administration is on the verge of greatly expanding the number of workers who are eligible for overtime pay. Ever since the Fair Labor Standards Act of 1938, many workers earning below a certain threshold have been entitled to time-and-a-half for any hours they work above 40 hours a week. You could think of this overtime rule as a more flexible way to limit work hours than, say, a straightforward ban on extra-long workweeks.

Large swathes of the labor force have always been exempt from the overtime rule, though these exemptions have changed over time. In 2004, the last time the FLSA was overhauled, white-collar salaried workers with supervisory responsibilities earning over $455 a week were made exempt. Essentially, the Labor Department is looking to raise the earnings threshold and to include workers who have some supervisory responsibilities but also spend some of their time doing non-supervisory work. Though we’re not entirely sure what the new earnings threshold will be, Politico reports that it is likely to be more than twice as high as the current threshold.

So what might this new overtime rule mean? It is difficult to say exactly how many workers will be affected, but the labor-aligned Economic Policy Institute estimates that a revision of the FLSA along these lines would likely impact between 5 and 10 million workers. For an optimistic interpretation of a more stringent overtime rule, I recommend reading EPI’s report on overtime from last spring, by Jared Bernstein and Ross Eisenbrey. The National Retail Federation, a lobbying group backed by many low-wage employers, offers a more pessimistic take, focused on the retail and restaurant industries, where they estimate that as many as 2.2 million workers will be affected. More broadly, they observe that employers who choose not to raise their prices to meet higher compensation costs will have a number of other strategies available to them: they might lower hourly pay rates to ensure that compensation costs remain roughly the same; shift compensation from benefits to wages to ensure that employees are above the new overtime threshold; or reduce hours below 40 hours a week.

To some proponents of a more stringent overtime rule, a shorter workweek would be a positive outcome, as it means more leisure time for workers, and perhaps more hiring, albeit potentially more hiring of part-time hourly workers at lower wages. I don’t doubt that there are at least some workers who’d welcome the prospect of working shorter hours, and the new overtime rule will serve them well by raising the price of overtime to their employers. Yet I’m just as convinced that there are many workers who’d like to work longer hours, and that the new overtime rule will work against them. Who will speak for workers who will suffer when their hours are cut?

Rather than advance the interests of workers by making overtime rules more stringent, policymakers ought to consider a broader, more ambitious agenda: By pursuing more growth-friendly tax and regulatory policies, we’d encourage employers in every sector to expand their workforce; by leveling the playing field between incumbent and start-up firms, we’d have more employers competing for workers; and by expanding apprenticeship programs, we’d ensure that entry-level workers could upgrade their skills by learning on the job. Democrats, led by President Obama, deserve blame for their fixation on 1930s-era labor regulations. But so do Republican lawmakers, who need to do more than just oppose measures like the Labor Department’s new overtime policy — they need to offer real alternatives.

— Reihan Salam is executive editor of National Review.

Editor’s Note: An earlier version of this piece misidentified Jared Bernstein as Jared Diamond.

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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