Liberal Economists Are Caught in a Bind Trying to Sell Obama’s Overtime Laws

COMMENTARY Budget and Spending

Liberal Economists Are Caught in a Bind Trying to Sell Obama’s Overtime Laws

Apr 2nd, 2014 2 min read

Research Fellow, Labor Economics

As research fellow in labor economics at The Heritage Foundation, James Sherk...
President Harry Truman once famously quipped: “Give me a one-handed economist! All my economists say, ‘On the one hand, on the other . . .’”

This probably isn’t exactly quite what he meant, but some economists are earnestly taking both sides of a debate over President Obama’s new overtime regulations, which expand time-and-a-half requirements to certain jobs. In a recent NPR debate (with me) Ross Eisenbrey, vice president of the liberal Economic Policy Institute, argued that companies would not offset salary increases by cutting base pay (minutes 28:50–32:45, emphasis added):

There are actually several different routes that an employer could take to deal with this, and despite the one anecdote that James suggested [see my remarks at 27:00], the one that is probably least likely is the one he suggested [companies will cut pay by an offsetting amount], and we have 75 years of history under the Fair Labor Standards Act, and I do not think there is evidence that that is what happened in the past . . .

Well, I just think, you know, you can speculate. But, he says he has evidence, I have never seen it. I don’t think that it is true. Wages are sticky and employers are not going to drastically cut worker’s pay and then expect them to work overtime and be as motivated and as happy as, you know, as they were. They won’t be as productive and employers really aren’t likely to do that.

On the other hand, in a recent report Eisenbrey argued expanding overtime would not cost jobs — because companies would offset them with equal and opposite pay cuts (emphasis added):

All else equal, would this lead to fewer hours of work demanded by employers? Not necessarily. The determinant issue in cases of wage mandates (or taxes) is one of incidence. Who bears the cost of the mandate? . . .

While opponents of such changes historically have argued that they distorts the labor market by increasing the marginal costs of labor, this line of argument erroneously assumes that the incidence falls on the employer, not the worker. Labor economists consistently assume otherwise—that the incidence falls on the worker—which in this case means that the wage offer reflects expected overtime hours, as shown in footnote two. As such, there is no change [in compensation] at the margin from expanding coverage, at least once the pay of newly covered, existing workers is allowed to adjust.

Eisenbrey’s footnote two even helpfully explains how to calculate how much employers would lower base wages to keep total weekly pay the same. So which hand has it? Does expanding overtime mean “no change” in total compensation, or is that the “least likely” response from businesses, who’ll be forced to increase compensation?

The former. While Eisenbrey might speak from both sides on this issue, most labor economists do not. Study after study after study — including studies that Eisenbrey cites — find companies offset the cost of new overtime rules by lowering base pay. Workers’ total earnings change little. President Obama’s proposed overtime regulations would turn millions of salaried workers into effectively hourly workers — and not much else.

 - James Sherk is senior policy analyst in labor economics at the Heritage Foundation.

Originally appeared in the National Review