About those new overtime rules that the White House is announcing...

As you may have heard, tens of millions of people are going to be getting a raise soon courtesy of the Department of Labor. We’re not talking about an increase in the federal minimum wage (which remains essentially dead on arrival in Congress), but rather a change to the rules as to who qualifies for time and a half pay for working more than forty hours per week. Currently your employer only has to pay the bonus rate to “salaried” employees who earn less than $23,660 a year, but that’s about to more than double. (CBS News)

The Department of Labor on Wednesday will finalize a rule extending overtime protections to 4.2 million more Americans currently not eligible under federal law, boosting wages by $12 billion over the next 10 years, the White House said Tuesday evening.

The updated rule, which takes effect Dec. 1 and doubles the salary threshold below which workers automatically qualify for time-and-a-half wages to $47,476 from $23,660 a year, or from $455 to $913 a week. Hourly workers are generally guaranteed overtime pay regardless of what they make.

“We’re strengthening our overtime pay rules to make sure millions of Americans’ hard work is rewarded,” President Obama said in a statement. “If you work more than 40 hours a week, you should get paid for it or get extra time off to spend with your family and loved ones.”

This doesn’t apply to hourly wage earners who already have to be paid time and a half for overtime, but rather to salaried employees. That’s a term which has really evolved since I was a young man. Traditionally, management and people in supervisory roles were generally the only ones who were on salary and they tended to be better compensated to make up for the extra hours they generally have to put in as part of their expanded duties. But employers realized that they could save money by transferring “professionals” (a rather ambiguous term at best) into salaried positions and expect them to put in more than forty hours per week without having to pay them any extra money at all, say nothing of a higher rate.

In other very common cases, workers wind up in a hybrid salary / hourly classification where they are paid for extra hours worked, but without any increased rate. While perhaps not as good as getting time and a half, this allows them to boost their pay when there is extra work to be done.

I’ll admit that from the layman’s perspective this system has been abused a fair bit by many employers and workers tend to feel they’re getting the short end of the stick on it. But at the same time, we have to consider that quote from the President when he talks about the rules change translating into $12B in additional pay over the next decade. That money has to come from somewhere and it doesn’t take a rocket scientist to figure out that it’s the employers who will be shelling it out. This, according to some analysts, is going to cause people to fall victim to the law of unintended consequences. (Politico)

Even before it was released Tuesday in final form, the regulatory change had created an uproar in Congress and among business groups, with multiple congressional hearings on the damage it would purportedly wreak on the economy and the National Retail Federation calling it a “career killer.” …

Republican lawmakers, not surprisingly, are far less enthusiastic about the Labor Department’s proposal. In March, lawmakers in the House and the Senate introduced legislation to block the rule sight unseen.

Business groups are also displeased. Randy Johnson, senior vice president for labor at the U.S. Chamber of Commerce, said that while the Labor Department made some changes to the final rule, it “still represents another regrettable burden being piled on employers as they attempt to grow in a tepid economy.”

So how will employers respond to this? In most cases we’re likely to see them cutting back on hours where possible which might, I must admit, make life a little nicer for the employees who are straight salary. But there are far more people in that hybrid category who actually are paid their same hourly rate for overtime. If they are relying on those extra hours as a regular part of their income and the employer scales back or eliminates the extra time, they actually wind up taking a pay cut instead of getting a raise. This seems to be the conclusion reached by Liya Palagashvili, co-author of the Mercatus Center paper, An Economic Analysis of Overtime Pay Regulations. You can read more about it in this Wall Street Journal article or find the full paper here, but she described it as follows:

The empirical research on overtime regulations suggests that employers will lower the base salaries to offset the anticipated cost of paying overtime. It’s possible that employers will also respond by cutting some benefits or replacing a junior role in the firm and hiring another employee at a senior role who can justifiably be paid above the overtime regulation salary threshold. Salaried workers will be reclassified as hourly workers, and many will begin punching a time clock again.

In the end, this most likely turns out to be yet another case of ill winds blowing when the government tinkers in the machinery of capitalism. If you really want to help the maximum number of workers both have jobs and earn as much as possible, you need to create conditions where businesses are free to expand, compete and grow. That results in a need for more workers and the natural process of competition to hire the best ones will drive up wages while expanding the need for more and more work to be done. Artificially forcing wages upward will always produce a backlash from those who create jobs and are seeking to maximize profits.

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