Can Obama Really Raise Wages for Millions of People So Easily
By David Henderson
Quick answer: No.
Jared Bernstein, of the Center on Budget and Policy Priorities, writes:
By significantly increasing the salary threshold below which salaried workers get overtime pay, President Obama just took a big step toward updating a critical labor standard with the potential to boost the paychecks of millions of middle-wage workers, many of whom should be getting overtime but are not.
The current threshold is only about $23,700. The president’s proposal takes it up to $50,400, about $970 per week.
But the idea that a simple rule change can raise wages for millions of people is fantasy. Obama is acting as if he thinks that wages are just some arbitrary number that employers set. He really does seem to believe that if an employee is making, say, $40,000 a year and working 48 hours a week for, say, 50 weeks a year (the implied hourly rate would be $16.67), then an employer will respond by paying for 52 hours a week (8 hours of overtime times 1.5 for time and a half) at that same $16.67 for an annual pay of $43,333, a whopping 8.3 percent increase.
That’s not how it works. The regulations don’t magically make employees more productive. So what would employers do? One or more of three things. I list them in order of what I think is increasing probability.
1. If the employer were almost completely unimaginative, he would compare the the $43,333 in the above example with the employee’s productivity. Those who couldn’t produce something worth $43,333 plus the other benefits would be laid off.
2. Fortunately, though, for those otherwise laid-off employees, the employer has another option. Nothing has changed that would make the employer value the above employee’s output more or want the employee to work fewer than 48 hours. There’s a simple fix. Calculate that the number of hours that must be paid for per week, from the U.S. government’s viewpoint, is 52 (40 plus 8 times 1.5). So cut the hourly wage from the implied $16.67 above to $40,000 divided by 52 divided by 50, or $15.38. There’s some added paperwork hassle, but the employee makes the same amount.
3. A colleague with whom I was discussing this issue this week told me what his employer did many years ago when he was a young man in retail and his pay was under the threshold: have the employees clock in for 40 hours and work whatever number of hours the employer specifies. In other words, cheat. There is often a trust relationship between employers and employees. Most employees would have some understanding of the situation and would go along. The occasional employee would play the game and then go to the Labor Board of the state to complain. The Labor Board would force the employer to pay back wages but the employee would have more trouble than otherwise finding another job. The employer has to worry about this. But this solution would probably work most of the time.
By the way, there is someone I’ve very close to who just got a job a few thousand dollars under the threshold. I hope this person’s employer chooses #2 or #3.