Obama's New Overtime Rule: Bad for Workers

Good intentions aren't enough.

Photographer: Andrew Harrer/Bloomberg

President Barack Obama is right to want to put more money in the pockets of lower-paid workers. Issuing another government regulation, however, is not the best way to get it there.

Once a new Labor Department rule takes effect, workers earning between $23,660 and $47,476 will be entitled to overtime pay -- extending a provision that already applies to the lowest-paid. The new upper threshold will be increased every three years in line with a measure of wage growth. More than 4 million workers will be newly eligible, according to the government, boosting wages by an estimated $12 billion over the next 10 years.

The vice president of the Economic Policy Institute, a left-leaning think tank that pressed for the reform, praised it as "sort of a minimum wage for the middle class." That’s exactly the problem: Like the minimum wage, the new overtime policy raises the cost of labor and thereby puts jobs at risk. The new rule is sure to have other unintended consequences too, once employers start looking for ways around it. There are better ways to help workers.

Employers already contending with rising minimum wages will now be all the more likely to find ways to automate processes, cut workers’ hours, reduce other benefits and bonuses, or all of the above. In the case of overtime, the scope for this kind of arbitrage is especially wide: Where the newly eligible workers are paid more than the minimum, basic rates can be cut to make room in the budget for the new mandate.

Minimum Wages

On top of any direct cost, there’s the added burden of one more complex layer of regulation and the overhead required to comply. Labor markets vary enormously from place to place and industry to industry. That’s why it’s best to let employers tailor their offers accordingly, according to their preferences and market conditions.

Please note: This is not a call for laissez-faire. Be hands-on about improving workers’ prospects, by all means -- but be smart about it. It's not hard to devise policies that raise incomes while boosting, not reducing, demand for workers. The earned income tax credit does both, and works well. Expanding it should be a top priority. Helping workers move or retrain also serves both purposes. Numerous poorly coordinated subsidies for training and mobility are in place; they should be simpler, better attuned to the needs of employers, and more generous. And there’s no better way to raise incomes and get more people into better jobs than to educate them well in the first place

Ask Europe (average unemployment rate: 10.2 percent) what layer upon layer of kind-hearted, cost-enhancing regulation has done for the prospects of the working and non-working poor. Meddling ineffectually in the labor market may be good politics, but it does American workers no favors.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.