Overtime Gets a Break
President Obama announced a regulation to more than double the threshold for overtime pay. How much will this help the American middle class?
On Monday evening, President Obama took to the Huffington Post to announce that he would more than double the threshold for what a person can earn and still be eligible for overtime pay, from $23,660 to $50,440, expanding the number of workers who qualify by 5 million. The new cutoff will restore the threshold to what it was in the 1970s, adjusted for inflation.
The change is “good for workers who want fair pay,” the president wrote, “and it’s good for business owners who are already paying their employees what they deserve—since those who are doing right by their employees are undercut by competitors who aren't.”
The new rule will be a boon to certain groups. As Lydia DePillis writes in The Washington Post, “If all salaried managers making between $455 and $970 per week suddenly became eligible for overtime, the change would disproportionately affect women, minorities, younger people, and the less educated,” who are overrepresented in the jobs that pay in that range.
But, though it may mean a lot to some workers, economist Daniel Hamermesh of the University of Texas was quick to emphasize that this is a relatively small measure, when considered in the context of the entire American economy. “Of all the things that could be done to improve the economy, it’s not a biggie,” said Hamermesh.
He added that though the president emphasized the effect the measure would have on wages, there will also be important consequences for job creation. “Overtime is a tax on long hours,” he said. If employers want to avoid paying overtime wages, they may instead turn to hiring new workers.
As The New York Times points out, not everyone agrees. In a statement on the expansion of overtime, the National Retail Federation argued that a policy change would “add to employers’ costs, undermine customer service, hinder productivity, generate more litigation opportunities for trial lawyers and ultimately harm job creation.”
But Jared Bernstein, a former White House economist who has written frequently on the benefits of overtime expansion, says that the two main arguments against the president’s new policy contradict each other. The first theory is that employers “will adjust base wages down” to account for overtime wages. The other is that the measure will “raise business costs.” “They can’t both be right,” he argued. “It can’t be costless and expensive.”
The overtime rule change alone will only go so far in addressing the stagnated wages of the American middle class. As Noam Scheiber writes in The New York Times:
To overcome [the disparity in earnings between the middle class and the richest Americans], labor advocates and other experts say, there are two main approaches that promise to increase middle-class wages considerably. The first would be to improve the bargaining power of workers, so that they could claim more of the wealth generated by productivity gains, which the affluent are keeping primarily to themselves.
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The second type of policy change would be to limit the incomes of those nearest the top of the ladder—by reining in the favorable tax treatment of executive pay, for example, or raising income tax rates.
But, as Scheiber notes, those two changes are not exactly politically feasible at this time.