Comments on proposed U.S. overtime regulation
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In the Notice of Proposed Rulemaking (NPRM) RIN 1235-A111, DOL proposes to increase and automatically update the salary threshold for exemptions from overtime protections under the The Fair Labor Standards Act (FLSA). I observe in the comments below that DOL understates the economic benefits of the proposed threshold and that the proposed level is consistent with the historical growth in prices and economic output.
In its analysis of the effect of the proposed rule on hours worked, DOL understates the benefits to the workforce by failing to account for employers’ tendency to hire additional workers and to schedule non-overtime work in response to the rule change. Footnote 120 of the NPRM acknowledges that the substitution of overtime hours to non-overtime hours is a possibility, and that DOL understandably “did not have credible evidence to support an estimation of the number of hours transferred to other workers.” Yet it should be noted that this possibility is actually an implication of the fixed-wage model that partially underlies DOL’s analysis.
Ignoring this consequence of the economic model underlying DOL’s analysis causes the NPRM to overestimate the total reduction in economy-wide hours due to the proposed rule, at least in the short run. In particular, when the overtime premia threshold is raised, employers will substitute away from overtime hours and either hire additional workers or schedule additional hours for workers below the 40-hour threshold. Indeed, the fact that there is a spike of 40 hours in the distribution of weekly hours is consistent with the idea that firms substitute away from overtime hours. Moreover, private-sector analyses such as those by the National Retail Federation (2015) and Goldman Sachs (2015) predict increases in employment as employers hire additional workers to work non-overtime hours. This substitution toward non-overtime hours is necessarily implied by the fixed-wage model when output is constant, say in the very short run or in an economy with a large degree of excess capacity. Any offsetting increase in non-overtime hours will be smaller over the medium- to long-term, when both output and capital adjust more easily.
The possibility that some individuals will see increased employment through the extensive or intensive margins has important welfare considerations ignored by the NPRM. Based on empirical evidence describing the extent of overwork in the United States, the NPRM correctly concludes that the proposed rule may improve welfare because it “may result in increased time off for a group of workers who may prefer such an outcome.” At the same time, although many workers in the United States are overworked, a sizable portion of the labor force does not work as many hours as desired (Golden and Gebreselassie 2007; Jacobs and Gerson 2005). Footnote 135 of the NPRM states that the lack of existing scholarly studies precludes quantifying any increase in employment or hours due to the rule, but DOL should make clear that under certain conditions the fixed-wage model underlying their analysis implies that some workers will see an increase in hours. If these workers are under-employed, the shift in the composition of those hours from over-worked to under-worked employees will be a welfare-improving consequence of the proposed rule.
In its calculation of the monetary benefits of reducing hours, the NPRM fails to account for significant externalities associated with high levels of hours worked. The NPRM approximates the benefit an affected worker receives for an hour of additional leisure by the average hourly wage, but this approximation understates the social benefits when the social and private costs of work differ. Some empirical work calculates that longer work hours entail greater energy consumption and consequentially more environmental damage (Rosnick and Weisbrot 2006). And economic theory suggests that long work hours may be detrimental both within and outside of the household (Gersbach and Haller 2005; Folbre, Gornick, Connolly, and Muzni 2013). In a separate section on health benefits of the proposed rule, the NPRM also effectively acknowledges the existence of these externalities cited above, stating that the rule will not only benefit the worker’s welfare through its positive health effects but also “their family’s welfare, and society since fewer resources would need to be spent on health.” Although the NPRM states that its wage-based approximation may overestimate the social benefits of fewer hours worked because not all workers will prefer to reduce their hours, the exclusion of important externalities causes the NPRM to underestimate some benefits of reducing hours.
The NPRM also understates benefits by excluding the possibility that an updated salary threshold will improve pay for hourly workers who are not paid overtime, even when they should be. Rohwedder and Wenger (2015) find that 19 percent of hourly workers are not paid a premium for working overtime hours. While it is unclear if all of these workers are legally required to receive overtime payments (due to occupational exemptions), many of them are not receiving pay promised under the FLSA. The proposed, transparent update to the salary threshold will provide employers an opportunity to revisit whether their employees are paid according to the law.
Finally, the proposed threshold for the overtime weekly salary exemption appears to be consistent with a range of economically appropriate levels. The NPRM proposes raising this threshold to approximately $921, or the 40th percentile of the weekly earnings distribution of salaried employees working full-time. This level is appropriate because it is similar to the exemption threshold that already applied in 1975, after adjusting for inflation ($250 in 1975 dollars, or approximately $1,000 per week in 2014 dollars.). Yet if the labor market’s capacity to bear this regulation is determined by productivity, then this threshold is almost certainly too low. Since 1975, real productivity has grown by more than 72 percent, suggesting an overtime weekly salary threshold of at least $1,720, well exceeding the proposed rule.
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Folbre, Nancy, Janet Gornick, Helen Connolly, and Teresa Munzi. 2013. “Women’s Employment, Unpaid Work, and Economic Inequality,” in Janet Gornick and Markus Janti, editors, Income Inequality: Economic Disparities and the Middle Class in Affluent Countries, Redwood City CA: Stanford University Press.
Golden, Lonnie and Tesfayi Gebreselassie. 2007. “Overemployment mismatches: the preference for fewer work hours.” Monthly Labor Review. April.
Gersbach, Hans and Hans Haller. 2005. “Beware of Workaholics: Household Preferences and Individual Equilibrium Utility.” IZA Discussion Paper. February. http://ftp.iza.org/dp1502.pdf
Goldman Sachs Global Macro Research. 2015. “The New Federal Overtime Rules: A Greater Effect on Payrolls than Pay.” July 7.
Jacobs, Jerry, and Kathleen Gerson. 2005. The Time Divide: Work, Family, and Gender Inequality. Cambridge MA: Harvard University Press.
National Retail Federation. 2015. “Rethinking Overtime.” https://nrf.com/sites/default/files/Documents/Rethinking_Overtime.pdf
Rohwedder, Susann and Jeffrey B. Wenger. 2015. “The Fair Labor Standards Act: Worker Misclassification and the Hours and Earnings Effects of Expanded Coverage.” http://www.rand.org/content/dam/rand/pubs/working_papers/WR1100/WR1114/RAND_WR1114.pdf
Rosnick, David and Mark Weisbrot. 2006. “Are Shorter Hours Good for the Environment? A Comparison of U.S. & European Energy Consumption.” Center for Economic and Policy Research. December. http://www.cepr.net/documents/publications/energy_2006_12.pdf