by JB and Ben Spielberg.
The Congressional Budget Office just released an analysis of the impact of repealing the new overtime rule. The rule, scheduled to go into effect in a few weeks (December 1, 2016), raises the salary threshold below which salaried workers must receive overtime pay when they work more than 40 hours a week. CBO’s study finds that by repealing the new rule, 3.9 million workers would lose their eligibility for time-and-a-half pay for working overtime and 900,000 workers would “work more hours and have lower earnings than they will under the scheduled changes.” Affected workers would lose $650 in 2017.
While we always applaud CBO for their careful work, their evaluation of the new overtime rule makes many assumptions that go beyond the evidence.
Their most consequential assumption is that getting rid of the new OT rule by lowering the threshold under which salaried workers must be paid OT would lead to slower inflation. This drives the positive income results for most families.
But a) we are aware of no analysis of the rule that expects to find faster inflation, and b) the magnitudes of the employment and wage numbers seem too small to change the path of economy-wide price growth, so we strongly question this assumption.
On the first point, neither the Department of Labor, the National Retail Federation, Goldman Sachs, nor the Chamber of Commerce discussed an economy-wide price effect in their studies of the overtime rule. Thus, CBO’s finding that repealing the rule would lower price growth in some reliably measurable way seems well beyond their usual mainstream, research-based approach.
On the second point, it seems unlikely that less than 1 million workers working around 20 million more hours in total (about 0.01% of total hours) would move the price index down in any measurable way. The assumption that it would appears to come from the reduction in labor costs, which according to Table 3 range from $1.5 to $2.5 billion (though we argue below that CBOs estimated compliance costs, which consistently dwarf the payroll costs, are inflated).
But consider the minimum wage literature. In recent testimony, minimum wage scholar Arin Dube presents evidence that recent minimum wage increases (and proposals for increases) may raise the price level by less than half a percent. According to research by David Cooper, the total wage increase for the type of proposals Dube is considering is around $32 billion. If an intervention that is around 16 times the size of the one CBO is investigating here barely moves the needle on inflation, it’s hard to believe the price effects cited (though never shown; I’ve asked CBO for these data) in the piece.
CBO notes that there are two ways in which repealing the overtime rule will invoke new management costs for employers: it will increase the need for application of the duties test, and it could increase employee turnover. Repealing the higher threshold would mean that any salaried worker between $23,700 and $47,500 that wasn’t already identified as OT-eligible (i.e., before the new rule went into effect) would have to undergo the duties test of their eligibility.
CBO claims that the reduced costs in managing worker hours that will result from repeal will be much larger than the sum of those added duties test costs and the costs of increased turnover. But we know of no empirical justification for that determination, and the report does not show the budget agency’s estimate of either cost. In fact, CBO notes in the appendix that they “found no academic studies that provided a quantitative evaluation of the nonpayroll costs to employers of complying with the FLSA.”
In addition, Ross Eisenbrey points out that CBO significantly over-estimates the number of firms that would face “familiarization” costs, assuming that number to be almost double the number of workers affected by the rule. To better account for the much smaller number of firms that would face any compliance costs at all, these costs should be reduced by significantly more than half.
Ross also notes various assumptions that inflate CBO’s estimates, including the assumption that firms are not tracking the time of currently exempt employees and that it will be costly to adapt firms’ existing timekeeping systems to the new rule: “Should [under the new rule] the employer choose to convert a heretofore salaried exempt employee to nonexempt it should not incur any measurable cost in incorporating that employee into the system.” By overestimating these costs, CBO credits the repeal with more savings than are warranted.
Even without these methodological questions, CBO’s report is limited in its ability to tell us whether the overtime rule is a good idea. That it helps more people balance their work and family lives and provides workers with a tool against exploitation by employers may be outcomes outside of CBO’s purview, but these are outcomes that should be at the forefront of policymakers’ minds.