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Economy & Business

Extension of Overtime Pay Regulations Moves to the Final Review Stage

The Wall Street Journal is reporting on another Obama administration labor regulation coming down the pipe that has the potential to burden the labor market even more: The overtime pay regulation.

The Obama administration has advanced to the final stages a contentious rule that will make millions more Americans eligible for overtime pay, moving President Barack Obama closer to achieving one of his signature initiatives aimed at strengthening the middle class.

The Labor Department sent its final version of the overtime-pay regulation to the White House Office of Management and Budget on Monday for review, according to an administration official. The OMB’s review is expected to last up to 90 days and be the administration’s final hurdle before the Labor Department can publicly disclose and implement the rule. Part of the OMB’s job will be to analyze the cost and benefits of the proposal…

The rule as proposed would make nearly five million more Americans eligible for overtime pay by more than doubling the annual salary threshold that generally determines who can and can’t get the added compensation when their workweek tops 40 hours.

This is another example of the administration’s attempt to grow the administrative state (read this great piece about Hillary Clinton’s soft despotism) and their attempt to dictate every part of our life no matter what the cost.

The rules may sound good (who wouldn’t want employees to be paid and protected from exploitation by their overlord employers) but their consequences will end up backfiring like many of the good intentions implemented through the regulatory system.

Take the rules to extend overtime pay requirements to salaried employees making between $23,660 and $50,440 and working more than 40 hours a week. The main purpose of the rules is to address what the administration sees as a rampant problem of underpayment and overwork in our labor force. However, it completely fails to prove that the underpayment claim is in fact correct. While most employers and trade associations agree that the $23,660 threshold probably can use an increase, they argue that setting the upper limit so high will have devastating impacts.

Other objectives of the regulations are to boost employment, workers’ health, and wages for employees. These are great objectives but this is hardly the way to go about pursuing them. I have never understood how anyone believes that forcing an employer to pay his employees more would lead to more hiring and longer hours for employees. After all, labor is a good like every other good. If you raise its price, the demand for it will go down. The only way, this is not the case is if you assume that most employers in America are sitting on a lot of unused cash and not paying their employees what they are owed because they haven’t been forced to. To be sure, it may be true for a few large firms but they make up a tiny portion of the firms out there. How likely are smaller businesses to be hoarding cash?

Now, if I’m right and employers do not have large amounts of money they can divert to paying more for their current workforce, what do you think is going to happen? I assume the regulations will achieve the opposite of their stated goals. Over at the Heritage Foundation, James Sherk has a paper explaining the impact of the rules. The whole paper is worth reading but here is a summary:

The Obama Administration has announced plans to require overtime pay for salaried employees who earn less than $50,440 a year—despite the fact that economic research shows that employers will offset new overtime costs by lowering base salaries. These regulations will have little effect on total weekly earnings or hours worked; they will require employers to rigidly monitor salaried employees’ hours. This would proscribe the flexible working arrangements that many salaried employees value. These regulations will limit workplace flexibility without improving pay. Expanding overtime regulations to more salaried employees will hurt the workers the White House intends to help.

Now, you can imagine some of the consequences that these rules will have: moonlighting, turning salaried employees into part-time employees, wage reduction.

As Don Boudreaux, my colleague at George Mason University, explained a few months ago, if the president is right about the lack of workers’ bargaining power, then things could become ugly very quickly. He writes:

If workers in fact have no bargaining power, then firms will respond to the president’s mandate by demanding from workers fully offsetting concessions such as lower base pay, fewer fringe benefits, or more difficult job duties. Without bargaining power, workers cannot refuse these offsetting demands. Therefore, the mandate, by causing the mix of employment terms to change without any increase in overall compensation, will at best leave workers no better off than before.

More realistically, because each unregulated firm – even one with incontestable monopsony power over workers – has incentives to arrange the mix of employment terms (for example, the mix of wages, fringes, and workplace rules) in ways that are most attractive to its workers, the president’s mandate will almost certainly result in mixes of employment terms that are less attractive to workers than were the previously offered mixes. This mandate will thus make workers worse off.

He has another great piece here.

James Sherk concludes:

Instead, [the rules] will effectively convert millions of salaried professional employees into hourly workers required to clock their time. Millions of workers will find that their employers can no longer pay them for a job completed instead of hours worked. While this makes little difference for employees with a fixed-job site, it will hurt those capable of working remotely. It will severely limit their use of the flexible work arrangements and telecommuting options that many rely on to balance their work and family lives. Expanding overtime regulations to more salaried employees will hurt the workers the White House wants to help.


But maybe one of the less reported outcomes of the rules are their terrible impact on employment innovation. At a time when the sharing economy is exploding and a growing number of Americans are moving away from traditional forms of employment, these rules are forcing everyone to follow an old one-size-fits-all model. These rules are likely to — and they may even be meant to — hinder the great innovations we are witnessing in the labor market thanks to technology. Rather than more rules, we should be going in the direction of permissionless employment. I made that case over at Reason a few months ago:

The good news is that permissionless employment is well on its way, thanks to the efforts of startups that use smartphone apps to match jobs with independent contractors. Examples go far beyond the well-known ride-booking platforms Uber and Lyft—there are also cleaning services like Homejoy, grocery delivery services like Instacart, last-minute errand-running services like TaskRabbit, restaurant-quality meal delivery services like SpoonRocket, and the list goes on.

This “demand economy” fundamentally challenges the work arrangements that became standard in the 20th century, and lawmakers and unions—who knew how to get ahead at others’ expense under those old arrangements—are not particularly happy about it. Fortunately, consumers increasingly are satisfied with the new economy.

But I guess it is too much to ask for our rulers — who think that they know best what is good for us and are committed to protecting us against our will — whether we need protection or not.

Last week, I wrote about Hillary Clinton’s outdated vision of the labor market.

Update: The administration claims the new rules will affect about 5 milllion workers.


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