Why Obama’s overtime rule may barely dent the economy

President Obama’s new overtime rule has been trashed as a job killer by conservatives and heralded as a salve for the middle class by liberals. In reality, the measure probably won’t have much of an economic effect, partly because employers will find legal ways of getting around it.

The new rule sounds dramatic. Starting in December, anyone who is a salaried worker and makes less than $47,476 must be paid time and a half for any work beyond 40 hours a week. For the last decade, only people who made less than $23,660 automatically had to be paid overtime. Anyone who made more than the threshold and performed executive or administrative tasks at work was exempt from overtime.

“This is the single biggest step I can take through executive action to raise wages for the American people,” Obama said in a weekly address Saturday.

It turns out that Obama is not raising wages for very many people. The White House estimates that 4.2 million people will become eligible for overtime compensation under the rule, and that it will push wages up by $1.2 billion a year for a decade.

But about 60% of the 4.2 million workers who will now be eligible for overtime do not work any overtime hours, meaning employers won’t change their pay because of the new rule, the U.S. Department of Labor found. So only the remaining 1.7 million workers will get a raise, about $718 a year on average.

U.S. employers pay about $7 trillion to some 140 million workers each year. That means the rule will bump up wages by a fraction of a percent, and it will affect about 1% of the working population.

“The rule will not have a disruptive effect on the broader economy given the share of workers affected, but it will be significant and meaningful for those who do benefit,” Heidi Shierholz, chief economist at the Department of Labor, said in emailed comments.

In California, which already has an overtime ceiling that is close to the new federal threshold, the immediate effect will be even more muted. However, because the state’s overtime ceiling is pegged to the minimum wage, it will rise sharply in coming years.

You might think that suddenly forcing employers to pay people time and a half for extra hours would make paychecks much bigger than they used to be for this small slice of Americans. You would be underestimating employers.

History shows that when governments tell businesses to pay people overtime, bosses respond by cutting base pay and hours.

It isn’t clear, based on existing research, whether bosses will hire new employees to work the hours that they cut from existing employees. But a test case for how companies will respond played out in California years ago.

In 1980, the state began allowing men to claim overtime for time they put in after eight hours on the job each day; women earned the right to daily overtime pay decades earlier. Five years later, the share of California men working extra hours had declined 24%, while men in other parts of the country increased their overtime work, according to a study published in 2000 by Daniel Hamermesh and Stephen Trejo, economists at the University of Texas-Austin.

The study found no evidence that giving men overtime pay forced employers to hire more people.

“This raises the cost of work overall, so total hours worked will go down [and] the total amount produced will go down,” Hamermesh said.

Producing slightly less may not seem particularly good, as far as American economic prowess goes.

But for workers, it has an upside.

There are 759,000 salaried employees who regularly work overtime now who will not get enough of a raise to become exempt under Obama’s new threshold. Employers will cut hours for those employees by 1%, but their pay will go up by 2.8%, the Department of Labor estimates, because they’ll be getting timeand a half for hours they previously weren’t getting paid extra to work.

That’s significant, given that for the last decade and a half Americans have been slower to cut their work hours than most industrialized nations. From 2000 to 2014, Americans cut their work hours 2.6%, or 0.2% a year on average. Germans and the Swiss now work around 6% fewer hours than they did in 2000.

“I don’t think man lives by output alone. I am a firm believer that Americans work too much,” Hamermesh said. “If we can’t get our act together to cut back, and this legislation gets us to work a little bit less, maybe that’s not such a bad thing.”

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