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The Obama administration’s initiative to expand overtime pay protections may present tough choices for businesses, but several economic studies suggest companies won’t respond with new hiring.
Employers would rather reduce working hours than pay more to keep their employees on the job. And they’re not likely to hire new workers to pick up the slack, perhaps because of the costs of recruiting and training new employees.
That may be why the White House has been reluctant to claim its new proposal on overtime pay would lead to faster economic growth by pushing companies to hire more workers. Instead, officials have cast expanded overtime pay as a question of fairness.
The effect on hiring “certainly wouldn’t be a primary focus right now,” said Betsey Stevenson, a member of the president’s Council of Economic Advisers. “What we’re trying to take a look at is how we can make the labor force as fair as possible for all workers and that people get rewarded for a hard day’s work with fair wages.”
Republicans, however, said broader overtime mandates would have a negative effect on growth. The administration’s announcement “seems engineered to make it as unappealing as possible to be an employer creating jobs in this country,” said Sen. Lamar Alexander, R-Tenn.
Although lower-paid workers could benefit from expanded overtime protection, there is evidence that employers find ways to blunt some of that pay increase. Employers can reduce hours worked or move to replace employees through automation, for instance. In some cases, they may simply decide to reduce production in response to higher labor costs, choosing to raise the risk of lost revenue rather than face the increased costs. After a while, they may also find a way to slow the growth in wages to reduce the overall compensation they pay to employees who work overtime.
Business world actions in response to an overtime pay increase will be somewhat muted, in all, but the impact on the labor force remains subject to debate.
“If the goal is to compensate workers more for long hours, it might accomplish that to some extent, whereas if the goal is to increase employment, there’s no good evidence that it does that at all,” said Stephen Trejo, a labor economist at the University of Texas who has studied overtime.
California offers a useful precedent. For years, state law required paying time-and-a-half to women who worked more than eight hours a day. In 1980, the state sought to expand the state’s overtime protections to male workers.
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.