CBOs report on the overtime rule makes some questionable assumptions

November 15th, 2016 at 2:42 pm

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.

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5 comments in reply to "CBOs report on the overtime rule makes some questionable assumptions"

  1. Deplorable says:

    My view of this is simple. We have lost touch with the idea and the purpose for having a difference between salaried people and hourly workers.

    Historically, the difference was clear because results were more distinguishable from effort in that earlier work. Over time thinkers have found ways to blur these traditional boundaries to the point of almost nonsensicality.

    There are jobs today where being salaried and being asked to work ungodly hours is somewhat reasonable. For instance, if the mission is to create a Mars colony, then what does overtime mean? Nothing for the salaried workers that do the work in their minds. It means a lot, however, to the janitor that just picks up the garbage after a celebration. Overtime pay is important here.

    This is an extreme example, but it conveys the original purpose of these laws, I believe. So let us go back, examine the original purpose, and make sure our laws are in accordance with those original purposes.

    The law in colonial times didn’t have to change very fast. Today, it needs much more agility. What a strange contradiction this is, where society demands faster changes in law at the same time government has become much slower in response.

    An objective observer might thing something is wrong here. I think something is wrong here.

    I’ll try to direct things the way I think they should go, but I cannot influence the mix of viewpoint. We’re going to have to let this play out.

    I feel like one against 7 billion sometimes. It crushes me at times. I can’t do this myself. We need to understand each other better before we can have real power!

    • Deplorable says:

      It probably seems strange to a lot of people, why did you put yourself in this position? Only the president is supposed to feel this kind of pain! And there’s some pleasure that makes it ok of you are president.

      Why? I cannot answer that question. I don’t know why I am what I am. I don’t know why I believe it is justified to cause pain in my parents to justify my own existence. I don’t know.

      I don’t know why I feel imprisoned by my children’s needs while I also feel that their needs are suffocating me. I don’t know.

      I don’t know why god gave me the will and the necessity to help us get to Mars, while at the same time it upsets my mother. I don’t know.

      I don’t know why I was given such a huge obstacle to overcome an an early age, one of evading enemies, of dodging them, of figuring new ways to overcome old ideas that size matters.

      I don’t know why my life seems to horrible right now given that I have so much that others would envy. I think it has something to do with debt. This biblical idea of debt was not far off from modern times. It has destroyed me as a person. Debt is destroying me.

      Debt destroys civilizations, I think.

      I’m 47 years old, and I can’t get a job. I’m a trained engineer, I’m good at my craft, but nobody cares. I pray every day that I’ll die in my sleep, please don’t let me watch my kids suffer my kind of fate.

  2. Deplorable says:

    I know some very rich people that don’t care about me. It gives me some perspective.

    I keep playing, “Lay your hands on me”, because it was a great song with a great message.

    I’m turning back to music…

  3. Fred Donaldson says:

    Why not keep the swing shift supervisor at a fast food joint making $24,00 a year exempt from overtime?
    The so-called “supervisor” usually fills in for workers who don’t show up and runs around picking up pieces and filling in when workloads increase.Just about the same work (plus headaches) as the people “under” him.
    Assuming the usual 60 hours demanded by bosses of exempt employees, this exempt worker makes a real $7.70 an hour without the 1.5 overtime – all hours counted as straight time.
    Adding overtime, if hired at $7.25 as non-exempt, he would earn $290 for first 40 hours, $217 for 20 hours of overtime, or a total of $507.
    The penalty for being the boss is being paid $462 a week ($24,000/52), versus $507 as an exempt hourly worker.
    Numbers tell the story, not the CBO or folks who always trust employers to act with honor.

  4. Smith says:

    It pains me to point out that I brought up this obvious subject (exempt status) before this blog did, and this blog brought up this subject before the administration did, and even George Bush realized the importance of playing with the Fair Labor Standards Act regulations, and of course made it more business friendly, as did Bill Clinton in carving out a special rule for tech workers. Yet Obama let the NLRB positions sit unfilled until near the end of his administration. This was a test of resolve and he failed which led directly to Republicans running roughshod over him when it came to the Supreme Court.
    The analysis of the CBO as you paint it is laughable. First, resetting the threshold merely restores the previous level set before it was eroded by inflation, to time when the economy thrived. Second the minimum wage raise made in a few states dwarfs any impact of the higher exempt minimum.
    Anyway, you’re playing their game by going on the defense and getting into complicated arguments.
    It should simply be a shout to the American public, you’re chumps, factory workers since the 1940s got time and a half working over 40 hours. Big corporations are reaping record profits while your dinner gets cold because we call you supervisors and professionals.
    California and New York can demonstrate an alternative economy with attributes like $15/hour minimums that may eventually compete with Trumponomics. Can the states also impose rules on time and a half? Would states face restrictions similar to environmental rules blocked by the Supreme Court ? http://www.nytimes.com/2016/02/10/us/politics/supreme-court-blocks-obama-epa-coal-emissions-regulations.html