In announcing the Obama administration’s new overtime rule (for more on this news, see this explainer), Vice President Joe Biden says companies will “face a choice” to either pay their workers for the overtime that they work, or cap the hours that their salaried workers making below $47,500 at 40 hours each work week.
“Either way, the worker wins,” Biden said.
Biden has held political office for more than four decades, and yet he has still not learned one of the most basic and important concept in economic and political policy: consider that which is unseen.
As Frederick Bastiat explained 125 years before Biden first took office,
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession–they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee.
If Biden, President Obama, and the others in the administration were better economists, they might have forseen the following five consequences of this disastrous policy:
1. It will cause low-productivity workers to lose their jobs — Imagine you’re an employer faced with a choice: you can pay an employee $913 a week or you can pay them $1,084 a week for the same amount of work. Which would you choose? All things being equal, you’d naturally pay the $913 and save nearly $9,000 a year in labor costs.
Now imagine you are an employee making $913 a week, but it takes you 45 hours a week to accomplish what some others can do in 40. What happens to you under the new FLSA rule? You lose your job. Rather than pay you for five extra hours of overtime, the employer will simply replace you with someone who can get the work done in under 40 hours.
2. It will lead to reductions in salaries — Let’s again consider the scenario above, but this time assume that the workload takes 45 hours a week. Previously, a single salaried employee was getting paid $913 a week to complete the task. But now the cost would be $1,084. How can the employer continue to pay $913? By hiring two part-time employees.
This expectation of employer behavior has been repeatedly confirmed. Donald J. Boudreaux and Liya Palagashvili of the Mercator Center observe that, “Studies in the United States have found that employers reacted to the introduction of overtime payment rules by decreasing the base salaries of affected workers. In Japan, researchers have found that workers who were not exempt from overtime payment rules earned on average a lower base salary than their exempt counterparts, and often also worked shorter hours.”
3. It will lead to more lawsuits — There is one group that is sure to benefit from the new rule: litigators.
Compliance with FLSA rules on overtimes is already difficult and costly. As Kira Bindrim notes, “The number of FLSA cases filed in US district courts has already skyrocketed, to 8,781 in 2015 from 4,039 a decade earlier. Overall, the FLSA caseload has increased by more than 400% since 1996.”
The average cost to settle a case: $5.3 million.
To avoid paying millions, most employers will err on the side of caution by taking actions that will likely hurt employees. Still, the increase in affected workers means that overtime lawsuits will increase substantially, making lawyers richer and companies — and the people who work for them — much poorer.
4. It will lead to fewer salaried positions — Some employers are willing to pay an employee a fixed salary (plus benefits) because it is easier to account for a fixed labor costs than a variable costs that fluctuates and spikes due to changes in the factors of labor (e.g., seasonal increase in sales).
But the Obama administration has made that less attractive for employers. They now have a strong incentive to eliminate certain salaried positions and replace them with an hourly wage. As House Speaker Paul Ryan said, “By mandating overtime pay at a much higher salary threshold, many small businesses and non-profits will simply be unable to afford skilled workers and be forced to eliminate salaried positions, complete with benefits, altogether.”
5. It will increase college tuition costs and student loan debt — As Linda Harig, vice president of human resources for the University of Tennessee, tells the Washington Post, the university will “need to spend an additional $18 million to afford overtime pay for employees who would become eligible under the new guidelines, such as admission staff, hall directors and people with post-doctoral positions.” That’s the equivalent of a 4.3 percent increase in tuition.
Colleges will have to pay more in salaries, which requires raising the cost of tuition. And since so many students are having to take loans out to pay for their education, their debt load will increase.
These are but five obvious examples of the ways the worker doesn’t “win.” There are numerous others that can just as easily be foreseen.
So why then does the Obama administration not acknowledge this reality? Do they truly not see how this rule will detrimentally affect workers? Or are they simply more interested in giving the appearance of helping workers rather than taking actions that will actually improve the conditions of the working class?
