The economics of Obama’s latest labor market power grab

President Obama has announced that, through executive order, he will be changing the rules regarding which employees have to be given overtime pay for working more than 40 hours per week. Under current regulations, all hourly employees who work more than 40 hours must be paid “time and half” for overtime hours. In addition to that, salaried workers who are paid less than $455 per week must also be paid for overtime hours.

With the stroke of a pen the president is changing this, and as of January 2015 the $455 threshold will be raised. While the new threshold has not yet been determined, news reports suggest that it will be somewhere between $550 and $970 per week.

So what might be the impact of such a change on affected workers? Contrary to the president’s claims, it is likely to be negative. First it should be noted that, for salaried workers in low level managerial position, those who are most likely to be effected by this change, the way to move up in a company is by increasing your productivity per dollar of compensation. There are essentially two ways of doing this. The first is by being more productive within the confines of a 40 hour work week, and the second is by working longer hours. For workers affected by this rule change the possibility of doing the latter, i.e. making yourself more productive by working more hours, is eliminated. In fact, with this rule change, an employer is incentivized to not even allow an employee to demonstrate his willingness to be more productive in this way. By implication, in the future salaried employees working for less than the weekly pay threshold would probably see fewer and smaller pay raises. The only way an employee can climb the economic ladder is by making him or herself more productive and demonstrating that increased productivity to an employer. What President Obama’s new regulations do is cut off an important avenue for advancement within a company and within the labor market more generally for those who are at the beginning of their careers and at the bottom end of the economic ladder. These are workers whose main career goal is, in all probability, economic advancement.

Economic analysis would also suggest that there is another negative impact for the affected populations. We should also expect that entry level starting salaries for low-level managerial positions will be reduced. This is because the impacted workers will be hired with a different set of expectations regarding their level of output for the company. At the present time, compensation levels include the expectation that, if need be, workers will put in more than 40 hours a week without additional compensation. In other words, if expected productivity per dollar of compensation is reduced, then simple economic analysis would suggest that so will be salaries. So while lower waged salaried workers will receive overtime pay for work above 40 hours, it is likely that base salaries will be reduced to offset this.

As with his advocacy for increasing the minimum wage, President Obama demonstrates that he is either ignorant of economics or willing to take advantage of the ignorance of the electorate to advance his political and ideological goals. Both of these policies will hurt those they are presumably meant to help. On the other hand, if the president’s true goal is to increase state control over labor market decisions then, clearly, with the implementation of these policies, his mission will be accomplished.

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