What will happen if the U.S. overtime threshold is raised?

President Obama late last week announced that the U.S. Department of Labor is proposing a change to overtime regulations. Specifically, the regulation would increase the income threshold under which workers are eligible for overtime compensation if they work longer than 40 hours a week. The threshold is currently at roughly $23,660 a year, whereas the proposed rule would lift it up to $50,400. If the rule is implemented, any worker without management duties making under $50,400 a year would be eligible for overtime if they work more than 40 hours in a week. On its face, this seems like a significant raise for many workers. But what does the economics research say?

First, how many people would be affected by the increase in the threshold? Currently, 8 percent of salaried workers are covered by overtime regulations, according to data from the Economic Policy Institute. According to calculations by the Department of Labor, the higher threshold would cover an additional 5 million workers in its first year while EPI pegs that number as closer to 6 million workers. So the share of workers covered would rise to about 45 percent.

The larger question is how employers will respond to the higher threshold. The effects could be quite different depending upon your understanding of the labor market. And unlike the effects of raising the minimum wage, which have been studied at great depth, there is little research which looks at the implications of a higher threshold for earnings and employment via increased overtime pay. So we can’t point to a large body of empirical studies for the answers.

Theoretically, however, employers could react to the higher threshold and the prospect of paying workers more for work in excess of 40 hours a week in two ways. The first is that employers will find a way to change the mix of compensation so they end up paying the worker the same amount anyway. The employer might reduce the wage rate for workers so that when overtime kicks in, the total wage bill ends up being the same. A study by Anthony Barkume of the U.S. Bureau of Labor Statistics finds just this anticipated outcome. This result makes sense if we believe labor markets are perfectly competitive.

But if the labor market isn’t perfectly competitive, and raising the proposed overtime threshold increases the bargaining power of workers, then something very different could happen. That’s the result of a 1991 study by the University of Texas’s Stephen J. Trejo, who finds that lifting the overtime threshold will indeed boost wages. Another possible implication is that employers hire more workers to do the job that existing employees would be doing if they worked overtime.

Currently, the amount of research on the topic isn’t conclusive enough to determine how an almost doubling of the overtime threshold would affect the broader labor market. An individual’s view of the likely results are, at this point, determined by their overall view of the labor market. To get a better understanding, we simply need more research. Hopefully, it’ll be on the way.

July 6, 2015


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