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The Obama Administration’s Inconsistent Labor Economics

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My former GMU student (and SUNY-Purchase economics professor) Liya Palagashvili and I just completed writing the first draft of a paper (to be published by the Mercatus Center [2]) analyzing the likely economic consequences of the recent proposal by the Obama administration [3] to extend what it calls “overtime protections” to millions of workers in America who have had the good fortune until now to be exempt from such “protections.”  These workers’ good fortune is about to expire.  Uncle Sam will soon impose on them and their employers labor-contract terms that will at best fail to improve the well-being of the targeted workers and, more likely, harm nearly all of them.  (But what the heck?!  The proposal [1] appeals to economically uninformed pundits, professors, and voters, [2] is likely to artificially increase the demand for highly paid workers, and, [3] creates more work for officious bureaucrats and opportunistic lawyers.)

In this post I’ll not discuss the main points of Liya’s and my paper.  Instead, I write now only to flag a deep inconsistency in the Obama administration’s labor economics.

The administration’s overtime proposal will force millions of workers who do not currently charge their employers extra for any overtime hours that these workers work (that is, for hours worked in excess of 40 hours weekly) to charge their employers a minimum wage of time-and-a-half for each and every such hour worked.  Although some of the public commentary on this proposal asserts that it will raise the annual incomes of the affected workers, the proposal itself argues that the principal effect of forcing workers to charge 1.5X overtime will not be to increase these workers’ incomes but, instead, to incite these workers’ employers to hire other workers to perform the tasks that were previously performed by the affected workers when they worked more than 40 hours weekly.

In short, the proposal argues – boasts! – that, by forcing up the cost of using worker Jones to perform certain tasks, the government will cause employers to substitute worker Smith for worker Jones.  (Quoting page 14 of the proposal: “The first [objective of the proposal] is to spread employment by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours, thereby reducing involuntary unemployment.”)

What a fascinating prediction coming from an administration that, in arguing elsewhere for raising the minimum wage, insists that a higher minimum wage will not discourage the use of workers whose wages are thereby increased [4].

That is, in pushing for subjecting more workers to government’s so-called “overtime protections,” the administration argues that employers, being sensitive to the higher cost of using worker Jones to perform task OT, will be led by the higher cost of using Jones to perform OT to substitute away from using Jones to perform OT by opting for lower-cost alternatives – such as worker Smith – to perform OT.  But in arguing for raising the minimum wage, the administration dismisses as faulty predictions that the higher wage will cause employers of the affected workers to substitute away from using these workers.

Wow.

What reason have we to believe that forcing up the price of a worker in situation A will cause no substitution away from that worker in situation A, while forcing up the price of a worker in situation B will indeed cause substitution away from that worker in situation B?  I see no good reason to entertain any such fanciful belief.

Yes, yes, yes – clever boys and girls can (and will) attempt to impress us with displays of analytical acrobatics that show that, under juuusst the right set of circumstances with juuusst the right set of finely calibrated wage hikes, substantial substitution occurs in one situation while no (or de minimus) substitution occurs in the other.  But the burden of intellectual proof is heavily on the Obama administration to explain this glaring apparent contradiction in its labor economics – a contradiction that, I suspect, it does not even notice.  Obama & Co. certainly gives no evidence of even attempting to explain it.

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