President Obama’s recently proposed rule for overtime pay is well-intentioned, but it has the unfortunate potential to harm the very workers it intends to help.
Under current policy, employers must pay workers time and a half for every hour beyond the 40 hour workweek if the worker earns a salary of less than $23,660. President Obama’s proposal would raise the threshold for the overtime pay requirement to $50,440.
Proponents of the policy argue that the new rules will either boost incomes for workers by increasing their earnings for the hours they are working now, or will boost employment if employers fill the additional hours with new workers instead of existing ones. However, the economic evidence so far indicates that neither of these outcomes is likely to occur. Instead, what seems like a win-win proposal for workers is in fact a lose-lose proposition for both workers and employers.
Let’s turn to the data. A 2010 paper by Anthony Barkume studied the effects of overtime pay regulation on hours worked and employment using data from the 2004 Current Population Survey. Barkume found that in response to the requirement to provide overtime, employers lowered the base wages for workers likely to receive overtime hours.
Alternatively, for workers who earned close to the minimum wage, firms could not adjust their wage down any further. Instead, the data suggest that employers cut minimum wage workers’ hours.
These results echoed an earlier study from 1998. That study examined the effects of overtime pay provisions of the Fair Labor Standards Act by comparing average weekly hours worked in the wholesale and retail trade sectors between 1938 and 1950. The wholesale sector was subject to the FLSA overtime rules, but the retail sector was not. The study found that, on average, weekly hours worked in the wholesale trade sector fell as did the number of workers who reported working more than 40 hours per week.
In the South, where minimum wage legislation made it harder to adjust wages downward, the fall in hours worked was even greater. Moreover, neither of these studies found the overtime rules to have a positive effect on employment.
We can never be completely certain of how changes in policies will affect workers, but our best option is to predict the outcomes of policies based on the evidence that we have so far.
A similar issue arises with minimum wage legislation. While an increase in the minimum wage is assumed to increase take-home pay for low-income workers, the latest evidence suggests that the effects are largely adverse. The minimum-wage hikes of the 2000s have been shown to reduce employment of low-skilled workers. Not only that, the research suggests that such minimum-wage hikes reduced opportunities for upward mobility and increased the likelihood that workers would work without pay.
All of this evidence suggests that we need to be cautious when formulating policy. A policy that aims to help workers does not necessarily result in beneficial outcomes for workers.
This is not to say the government has no role in helping these households and workers. On the contrary, government tax credit programs, such as the Earned Income Tax Credit program, have been shown to successfully boost employment and incomes for low-wage workers. Expanding a program like the EITC is very likely to help low- and middle-income households better support their families and encourage greater labor force participation.
However, policies that try to achieve these ends by mandating higher costs on employers, such as overtime pay regulations and minimum wage hikes, are usually riskier bets.
