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There Ain’t No Such Thing As Free Additional Overtime Pay

Here’s a letter to the Washington, DC- based WTOP Radio:

In your report this morning on Pres. Obama’s proposal to force employers to expand the number of employees who are eligible for overtime pay, you featured a clip of a law professor proclaiming that such intervention is made necessary by employees’ alleged lack of bargaining power.

This law professor is a poor economist.

If workers in fact have no bargaining power, then firms will respond to the president’s mandate by demanding from workers fully offsetting concessions such as lower base pay, fewer fringe benefits, or more difficult job duties.  Without bargaining power, workers cannot refuse these offsetting demands.  Therefore, the mandate, by causing the mix of employment terms to change without any increase in overall compensation, will at best leave workers no better off than before.

More realistically, because each unregulated firm – even one with incontestable monopsony power over workers – has incentives to arrange the mix of employment terms (for example, the mix of wages, fringes, and workplace rules) in ways that are most attractive to its workers, the president’s mandate will almost certainly result in mixes of employment terms that are less attractive to workers than were the previously offered mixes.  This mandate will thus make workers worse off.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030