Obama Overtime Fix Might Spur Hiring

The data say Obama's proposal for overtime pay will help workers -- just not necessarily the ones working overtime.
Her other duties may be executive. Photographer: Paul Thomas/Bloomberg

President Barack Obama wants to make more workers eligible for overtime pay. "If you have to work more, you should get paid more," he says. But the policy change might not have exactly the effect he suggests.

The increase in pay will probably be modest for existing workers. Yet there's a benefit he hasn't talked about: It could actually spur hiring.

At issue is how the Labor Department interprets a part of the Fair Labor Standards Act, passed in 1938, that exempts employers from paying white-collar employees -- such as supervisors and executives -- one and a half times their hourly wage after they pass 40 hours a week. The way the law decides whether employees get overtime is by their pay and their duties. If you make more than $455 a week and your role is "professional," "executive" or "administrative," you're ineligible.

A decade ago, President George W. Bush loosened the rules that set who employers could declare exempt from overtime. Bush's revisions to those duties made them so broad that employers could make workers who look nothing like white-collar executives ineligible for overtime. And, because the weekly-earnings cutoff isn't indexed for inflation, its real value has dropped by more than half since 1975.

A shift manager at a convenience store earning $25,000 a year, for example, meets the law's view of an "executive." Office secretaries, so long as their work can be said to include the "exercise of discretion and independent judgment with respect to matters of significance" -- a vague standard if I've ever heard one -- can count as "administrators."

That hardly seems right. If overtime does not exist for these workers, then for whom, exactly, is it supposed to exist? There's no question, then, that overtime isn't protecting the workers it should. But how much will Obama's changes help?

The impact of similar policy changes in the past suggests that while the benefits won't be huge or exactly as advertised, the economic costs are negligible. Overtime is, ultimately, the policy Obama says it is: one that makes some workers slightly better off at the expense of business profits.

Emphasis is required on "slightly." That's because economists think that, when government changes overtime rules, businesses respond by cutting the hourly wage that workers earn in their normal hours, so as to neutralize most of the effect on actual weekly earnings.

For example, suppose you earn $10 an hour for 40 hours a week, but your job routinely has you work 50 hours a week. You might hope that, if Obama's policy change made you newly eligible for overtime, that your pay would rise $5 an hour for the extra ten hours, leaving you with an extra $50 a week.

The work of economists Stephen J. Trejo and Anthony Barkume, unfortunately, shows that won't quite happen. Instead, what will probably happen instead is that your employer will cut back your normal hourly wage somewhat to offset the overtime pay -- to $9.25, say, or $9.50. That effect likely erases most but not all of the benefit.

That limits Obama's argument that the policy will boost take-home pay. What about the business lobby's warning that, if businesses have to spend more on overtime, they will cut other jobs?

This gets it the wrong way around. Overtime rules may lead to more, not fewer, jobs. That's because employers don't have to pay more if they cut overtime hours and will bring on new workers to avoid the overtime premium, as economist Jared Bernstein has pointed out. And that's how they tend to respond.

The highest-quality evidence comes from an odd "natural experiment" in California in 1980. At the time, the state had a rule that gave overtime pay to women, but not to men, if they put in more than eight and a half hours in a single day. Then, in 1980, the rule was extended to men. Employers chose to cut hours and reshuffle worker hours rather than pay up.

Specifically, those results suggest that employers affected by new overtime rules will cut overtime hours by a quarter and replace the time with new employees earning regular pay. That means more jobs with fewer hours -- in a word, "work-sharing."

Changing overtime rules will be a wash for most workers. There could be some boost to worker pay, but employers will limit it by cutting wages and hours. The reform could end up being better news to people without a job than those with one.

(Evan Soltas is a contributor to Bloomberg View. Follow him on Twitter at @esoltas.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.