Misinterpreting the Overtime Lit

March 18th, 2014 at 8:56 am

A number of commentators/critics of the President’s idea to update overtime coverage have been misinterpreting some of the literature on this issue.

For example, Evan Soltas tweeted out “The research on overtime seems to say that no, Obama’s proposal won’t make pay go up.”  Jason Richwine wrote “All else equal, working more overtime is associated with a lower wage rate, and the lower base pay is enough to cancel out most of the legally mandated overtime wage premium.”

Both authors are referring to the economic incidence of the new rule, i.e., who ends up absorbing the higher labor costs.  Economists often assume that any such mandates or taxes are passed on to workers through a lower base wage (e.g., it’s widely assumed that the employers’ share of the payroll tax shows up in a lower base wage).

Ross Eisenbrey and I note this impact in our recent paper on the need to update the OT threshold, pointing out that there is evidence in support of partial base wage adjustment in the case of overtime.  That is, when an employer makes a wage offer, she tries to lower the base wage to account for the costs of expected OT at time-and-a-half.  But the key word is “partial” (Richwine at least says this effect cancels out “most” of the premium, but that looks wrong too).

Here’s why I expect workers to benefit from the new rule, according to both the literature and some aspects of the rule change that differ from what the lit is looking at.

The most up-to-date work I’ve found on this is by economist Anthony Barkume.  In reviewing a key earlier paper (the paper to which Soltas links), he writes (my bold):

[The analysis concludes] that the FLSA overtime pay regulations do raise labor costs…because the reductions in the straight-time wage rate with higher overtime use were substantially less than those he assumed were necessary…to neutralize the effects on labor costs….

Barkume then updates the earlier model with better data again finds only partial offsets—typically less than half—and positive OT wage premiums of about 1.3, suggesting an offset of 40% (since the full premium is 1.5), and contradicting both Soltas’ “no benefit” and Richwine’s “cancels out most.”

Note also that the idea that employers will lower wage offers to offset OT pay is about the wage offer, not the incumbent workers’ wage.  History is quite clear that employers rarely reduce nominal pay.  When the administration lifts the threshold, it’s highly unlikely that employers will adjust base pay down to account for new OT costs.

The critique then becomes: “OK, but newly covered workers still won’t benefit from OT coverage because their employers won’t offer them OT hours now that they’re more expensive.”  Except here too, such workers are better off in terms of their hourly wage.  Remember, they weren’t getting paid for OT before.  If they earned $500 (over the current exemption threshold of $455 but certainly under whatever the new one turns out to be), and they worked a normal 40-hour week, their hourly pay is $12.50.  But if they were exempt and worked another ten hours of OT today, that hourly wage falls to $10, and 20% hourly wage cut.  In other words, not working unpaid OT is…um…good.

Finally, not unlike my comment on the restaurant lobby’s objection to a higher minimum wage, those who believe employers will simply offset the cost of OT by passing it onto workers should explain why the Chamber et al are all revved up about the change.  The biz lobby seems awfully convinced that the new rule will lead to higher labor costs that ding their bottom line, contradicting the offset assumption.

I’m sure some of the increase will be passed along to workers in lower base pay.  But a) not the whole thing, and b) those newly covered who are currently working unpaid OT will surely be better off.

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15 comments in reply to "Misinterpreting the Overtime Lit"

  1. doverby says:

    The people opposed to the overtime change definitely have contradictory reasons for opposing it. To them, it both decreases profit AND decreases the total amount that employees take home. You can’t have it both ways.

    • dwb says:

      Of course it can. Suppose every employee costs an additional $500 in compliance costs, paid to a company like ADP or Aon Hewitt, most of whose employees are salaried. Or, taking time away from my (salaried) managers who should be thinking up ways to raise revenue not circumvent rules. Each hourly employee costs more, I employ fewer of them (in reality, probably rearrange schedules or convert employees to exempt status depending on the rules), but none of the money flows to the actual employees. It’s basically a tax on hourly employment, which results in less hourly employment and lower profits.

  2. dwb says:

    The Chamber et al is revved up because there will be adjustment costs – rearranging schedules, recoding software, rewriting job descriptions, compliance costs, etc. “Increasing labor costs” does not mean increasing money wages, necessarily. Those “costs” won’t accrue to the actual employees the changes are designed to target, they will accrue to companies like ADP, most of whose employees are salaried. Actual managers will have to spend longer hours reading the new rules and figuring out ways to circumvent the new rules.

    It’s really a shame the Dems have gone back to 1970s command and control economics that did not work.

  3. Larry Signor says:

    If OT rules raise the macro wage, is that such a bad thing? Some wage inflation would only encourage demand, inhibited demand is the primary headwind cited by business. The circular arguments promoted by conservative economists are almost perverse. Minimum wage hikes will raise the price of a hamburger…what BS…only if we can buy more hamburgers. It’s that demand thing again…more $$$=more demand. This is not that difficult to understand. The freshwater frenzy has gone on too long, but the faithful give ground only grudgingly. Our economy and culture have been usurped by an inflexible meritocracy. I believe we are on the proper side of the argument.

    • Robert Buttons says:

      The government doesn’t (they try, oh they try) control wages. But the government does control currency. Why don’t they just create deflation and inflation adjusted wages will rise.

  4. carolannie1949 says:

    I think people forget that usually you don’t adjust benefits when you pay overtime, so often it is cheaper to pay someone overtime than to hire extra workers with benefits

  5. Robert Buttons says:

    Options business owners have to mitigate labor costs:
    1. Technology. At my business, we just replaced two humans with a new software system. We could have updated years ago, but the software was price-prohibitive. Lower software prices (and rock bottom financing(interest) rates put humans out of work. Yes, humans compete with tech on price.

    2. Fire workers and hire them back as private contractors with no benefits. A good plan to defeat Obama’s overtime proposal.

    3. Employee leasing. Employees make less, as there is an extra layer of management, but labor headaches (specifically govt induced headaches) are solved for business owners.

  6. smith says:

    I’m not getting why employees shouldn’t be paid for the hours they work. Of course overtime will result in lower profits for business owners, that’s the point, labor gets a bigger share. All the data says that increased productivity averaging 1.5% per year has not been flowing to labor for the past 10 or 20 years (it depends what industry), so this may redress some of the imbalance. There is also an unemployment problem, which overtime costs tend to reduce (hire sooner at straight time than paying overtime). There is also a demand problem in that money needs to find it’s way into workers who spend.

    What’s being totally missed is why the whole concept of exempt status should be unquestioned in a modern service economy, where factory work and manual labor play a much smaller role. Why do economists have trouble figuring out why high skill wages have stagnated? What is the role and significance of the special exempt rules that tech enjoys? Why isn’t it pointed out that Bush changed the rules just ten years ago? Conservatives knew it was important.

    The idea of compliance is a phoney issue. How did employers know that the same salaried workers now eligible for overtime were previously even working 40 hours? How did they judge whether the 40 hours were used effectively?

    There are important issues related to motivation and management that the prospect of overtime brings to the fore. But it should not be assumed that overtime automatically brings about a punch clock mentality, and adversarial management labor relationship, inflexible union contract like rules for all.

  7. Jason Richwine says:

    One of Barkume’s main insights is that there would probably be a market-driven overtime pay premium even in the absence of the time-and-a-half law. If that market premium is 1.28 times the regular wage–as it was in a UK study that he cites–then Barkume’s and (Trejo’s) estimate of the impact of the overtime law on base wages offsets about 80 percent of the predicted wage adjustment. Hence my use of the word “most” in “the lower base pay is enough to cancel out most of the legally mandated overtime wage premium.”

    • Jared Bernstein says:


      I thought line 3, table 4, wherein he does his own estimates, supported my point. IE, I think he’s estimating actual FLSA-generated overtime premia there. OTOH, the writing isn’t the picture of clarity–but that’s what I understood to be the case. See his equation 4, on which line 3, tbl 4, is based–seems to clearly have time-and-a-half in there.

  8. Anthony Barkume says:

    A point to keep in mind by both of you: we don’t have evidence on what the market overtime premium–if any would be. I did some calculations using the UK average overtime premium, but my article really does not have the evidence to see how total labor costs–and labor earnings–change with an overtime mandate. A further factor to consider–and I did present some evidence on that point–is that substitution between hours and men depends on the quasi-fixed labor costs in the job.

    • Jared Bernstein says:

      Thanks for weighing in. So are you distinguishing in your comment between an actual premium and what you called the “effective premium?”

      And what do you think may be the impact of the President suggested rule change?

      • Anthony Barkume says:

        I am retired now, so I am quite out of it, but:
        (1) yes, the effective premium would reflect the difference between the statutory premium and the “natural” market premium,
        (2) that said, I am in favor of overtime premium regulation, because the market at that margin (bargaining over overtime rates, given some expected amount of overtime) is quite thin. When markets are thin, there is a rationale for regulation. Workers frequently don’t have the information or bargaining power for the overtime bargains envisioned in the H. Gregg Lewis contract model. The fact that the data do show incomplete adjustment may reflect bargaining outcomes off the contract curve rather than a natural market premium. There was a paper in a Japanese journal recently that provided some evidence of worker disadvantages in overtime bargaining in Japan.

  9. Jennifer says:

    Hi Jared-
    I work for a nonprofit in the human-serving nonprofit sector. We support the proposed rule change, as our mission is to help lift families and communities out of poverty. However, we are finding a void of information concerning the impact this change would have on the human-serving nonprofit sector. As far as I can tell, there are no specifications for nonprofits in the proposal. We operate completely different the for-profit world. A large portion of our income is derived from government contracts and there is no indication that any contract rates would be increased due to increases in salary. We do not have a way to pass off costs to consumers and have extremely thin margins as it is. Working over 40 hours in our line of work, is largely caused by helping a child or adult in crisis. There is no way to tell when or how often that will occur and we cannot insert a different person, who has worked less than 40 hours, to serve in crisis situation. Any help in understanding how nonprofits can suggest implementation guidance to the administration that does not cause unintended consequences for our sector would be very helpful.

    • Jared Bernstein says:

      I tend to oppose exemptions to labor standards as there are surely many who believe they shouldn’t have to meet them. This increase in the OT salary threshold is really just bringing it back to its 1975 level adjusted for inflation. In that regard, think of it the same way you would a minimum wage increase that replaces the value eroded by inflation. I suspect you’re good with that idea.

      Here too, we’re talking about paying people making less than $50K a fair wage for working more than 40 hours. That’s the Fair Labor Standards Act in action, making sure lower paid workers get paid more for working long hours, even when they’re doing the Lord’s work!