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History Shows Overtime Pay Protections Are Disconnected From Employer Hiring

Douglas Graham/CQ Roll Call File Photo
Alexander is one of the Republican nay-sayers on the Obama administration’s initiative to extend overtime pay protections, declaring such actions to be a deterrent to hiring.

According to a frequently cited 2000 paper by Trejo and economist Daniel Hamermesh, employers faced with higher overtime reduced overall work hours to avoid higher labor costs. But the economists found no evidence employers hired more people to fill production needs.

The higher price of labor may have led companies to reduce production or replace workers with machines, Trejo said. Or they may have slowly reduced wages so the base wage combined with the overtime pay would not cost the employer as much, blunting the effect of higher overtime pay.

“It might not happen all at once. Maybe you’re not going to cut my nominal wage rate. But over time, there will be less incentive to get me a raise,” he said. “To some extent, it goes halfway or more towards neutralizing the effect of overtime laws.”

Overtime pay is guaranteed as part of the Fair Labor Standards Act, a New Deal law that sought to limit how much workers had to work, setting the standard of the 40-hour work week. In 1938, when the law was enacted, supporters claimed overtime protections would increase hiring because employers would no longer be able to make their existing workers put in long hours for little pay.

But even then, it seems overtime pay had little effect on hiring. A 1998 paper by labor historian Dora Costa looking at the 1938-1950 period found that overtime rules reduced the number of hours worked but did not directly translate into an increase in employment, although some increase in hiring may have been offset by minimum wages that were also mandated in the law.

Ronald Ehrenberg, an economist at Cornell University who has also written extensively about overtime, likewise found little evidence that increasing overtime pay would lead to an increase in hiring.

“Raising the overtime premium would not be an effective way of stimulating growth, even though it would lead to a reduction in overtime hours,” he wrote in 1987.

Still, that’s not necessarily a bad thing. A fast-food shift manager might end up working 60 hours a week while wanting to work less and spend more time at home, said Thomas DeLeire, a labor economist at Georgetown University.

“There’s a lot of jobs out there that are low-salaried jobs that require a lot of hours,” he said. New overtime rules that reduce the number of hours worked “might be an improvement in the work-home trade-off for many workers.”

But there are probably also workers who would rather work longer hours and make more money who would be hurt by a cut in their work week.

“Obviously, the policy cuts against the interests of those two different types of people,” DeLeire said.

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