How the Overtime Rule Hopes to Design Higher Salaries, But Can’t

The Labor Department has just issued a new overtime pay regulation for salaried employees. Under the new rule, all salaried workers earning less than $47,476 per year must be given overtime pay when they work more than 40 hours in a given week. This roughly doubles the previous threshold of $23,660. This will affect an estimated four million workers, raising their wages by $12 billion over the next decade, or an average of $1.2 billion per year.

By my calculations, that’s roughly $300 per worker per year. That can certainly help families with bills to pay—the problem is that this pay bump comes with tradeoffs. These range from reduced salaries to reduced hours—avoiding overtime pay altogether—to reduced non-wage benefits such as paid vacation, free parking, free meals, and other perks. These tradeoffs could easily cancel out any pay increases, leaving working families no better off than before, and possibly worse off.

Trey Kovacs is CEI’s resident expert on the overtime rule (see also CEI’s coalition letter we sent to Capitol Hill). But I cannot resist commenting on Labor Secretary Tom Perez’s remark that “[t]hese good paying middle class jobs were not a fluke brought about by an invisible market forces. They were good paying middle class jobs by design[.]”

F.A. Hayek’s most famous quote, from his final book, The Fatal Conceit, is “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Secretary Perez has unintentionally played right into Hayek’s invisible hand.

Employers would be delighted to pay every single one of their employees minimum wage, from the lowest entry-level position all the way up to high-powered senior executives. But they can’t, because market forces won’t allow it. Markets are the reason middle class salaries exist at all. Absent any top-down direction from Secretary Perez or other political operators, employees leverage their skills to bargain for higher wages. If your employer isn’t paying you what your skills are worth, you can take your talents elsewhere.

High turnover and the constant training that goes with it hurt a company’s bottom line. That is why Henry Ford paid his workers very high wages by the standard of the time. As workers gained experience and skill, they created more value. Better for Ford’s bottom line to pay skilled workers a middle class wage and keep them around than to have to constantly search for and train rookies.

A similar process plays out all over the economy, from construction to accounting to photography. Middle class wages are the product of human action, not human design. People respond more readily to their incentives than to political orders. Bottom-up, not top-down.

If anything, the overtime rule gives employers an incentive to be less generous to their employees, not more. And that may be just what we see in the coming years. Secretary Perez’s design will likely turn out rather differently than he intends. This is unfortunate, but also completely foreseeable.

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