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.