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The Obama Administration Works Overtime to Harm Workers

My richly talented former GMU student (and now SUNY-Purchase econ prof.) Liya Palagashvili and I have a new paper in which we explore the economics of the Department of Labor’s proposed changes to overtime-pay rules under the horribly misnamed Fair Labor Standards Act.  This paper was released today by GMU’s Mercatus Center.  Here’s a slice from the press release:

Under the Fair Labor Standards Act, employers must pay workers who work more than 40 hours in a week time-and-a-half for every hour worked over 40. Numerous exemptions to this requirement exist, including for salaried workers who have “executive, administrative, or professional” (EAP) duties and have a annual base salary of more than $23,660. The Department of Labor recently proposed removing the exemption for EAP workers earning an annual base salary of between $23,660 and $50,400, which would extend mandatory overtime pay to an additional 5 million workers. While the Department of Labor claims that this change will encourage additional hiring, improve the well-being of employees, and lead to higher paychecks, economic theory and empirical evidence suggest otherwise.

A new study for the Mercatus Center at George Mason University provides a thorough analysis of the Department of Labor’s proposed overtime rules, finding that the rules will fail to achieve their objectives and will reduce the diversity of labor contracts used across different industries in the United States. Research indicates that the rules will increase compliance costs for firms, and that employers will respond to the new requirements in unintended ways. In particular, employers will be forced to move some employees from salaries to hourly pay or find other ways to clock their work.

(Here’s a link to the Dep’t. of Labor’s proposed new rule.)

It’s very distressing to encounter today’s incessant treatment of wages and prices as if these figures are arbitrarily set numbers that merely determine how much of some fixed-sized pie is gotten by sellers and how much, therefore, is gotten by buyers.  There is simply no more plausible way to make sense of the proclamations about prices and wages emanating from all across the political spectrum than to assume that the people making such proclamation suppose that these figures are arbitrarily set on the market and that, therefore, when they are arbitrarily changed by government diktat, the only consequence is a change in the distribution of the fixed-sized gains from trade.

Even more distressing is (what seems to me to be) the increasingly large number of economists who treat market prices in this same pedestrian manner – whose understanding of the determination of, and of the role of, prices is no better than that of a sixth grader.  These are economists who don’t know even basic price theory – a reality that implies that these are “economists” in name only, for no one who does not understand, or who rejects, basic price theory deserves to be called “economist.”