It’s faded from the headlines, but a few months ago President Obama introduced an important proposal to update the rules determining who gets overtime (OT) pay in a way that could increase eligibility by at least 5 million workers.
So, good for the White House for taking this on, and the fact that it doesn’t need Congress to sign off on the proposal means that the update will occur. As I’ll discuss below, setting the key parameter — the salary level below which OT must be paid — at the right level is still an important and outstanding question.
But here I’d like to highlight a new paper co-authored by one of the nation’s top experts in the economics of overtime, economist Daniel Hamermesh, which sheds some interesting new light on the potential impact of the update: It could very well make those affected by it happier.
That may sound like a big “duh.” Some workers — those who should be getting overtime pay now but aren’t — will surely be made better off by a change that ensures they get time-and-a-half if they work OT. But employers might decide to hire new straight-time workers rather than pay current workers extra for OT (which is why Hamermesh called the reform a “job-creation program”).
So some workers might find themselves working fewer overtime hours after the reform. What Hamermesh et al show is suggestive evidence that this change could improve these workers’ life satisfaction. It could even make their spouses happier.
The evidence requires some caveats. First off, it comes from Japan and Korea, as those countries provided the researchers with both the policy changes (mandated increases in employers’ overtime costs) and data needed to examine their impact, and there are of course significant cultural differences between U.S. workers and those in the study that should be considered.
Second, while the results are fairly consistent across numerous data sets in both countries, and the authors try to control for any intervening variables, it’s impossible to be 100 percent certain that higher “life satisfaction” of those affected by the policy change clearly was driven by reductions in hours of work. All the authors can cautiously conclude “is that there are cases in developed economies in which workers’ well-being may be improved by interventions in the labor market that provide incentives to reduce hours of work.”
Still, that might surprise some readers. Why, if someone wants to work less than 40 hours in a week, don’t they just do so? Where’s the market failure requiring government intervention?
That’s an easy one. Though this is surely incorrect, basic labor economics assumes that each worker’s combination of wages and hours worked is optimal from both their own and their employers’ perspective. In econo-mese, the worker’s marginal product — their wage — is assumed to equal the rate at which they desire to trade off consumption for leisure. But the weak bargaining power of a lower-level employee obviously makes it hard for her to refuse overtime, even if she isn’t getting paid for it. Especially in weak labor markets, there’s lots of anecdotal evidence of people having to accept work schedules that make it impossible for them to balance work and family, completely vitiating those pristine “equilibration” assumptions.
Hamermesh et al also talk about “rat race” models “in which workers put in sub-optimal excess effort to distinguish themselves from slightly inferior workers.” I myself have worked in offices where if someone sees you leaving at five, they look at their watches and shake their heads. Again, in such cases, the classical assumptions do not hold.
So in the real world, many people don’t choose their hours of work. Moreover, the folks with the most flexible schedules tend to have the highest incomes, which is again upside-down when you think about who has the toughest time balancing work and family. Perhaps that’s one reason why Hamermesh et al found at least weak evidence of a positive “cross-elasticity,” wherein the well-being of Korean wives increased due to a reduction in their husband’s work hours.
Okay, back to the White House’s proposal. The key parameter alluded to above is the “salary test” below which workers must be paid OT. It has been occasionally raised over the years and currently stands at $455 per week, but because it’s not regularly adjusted for inflation, it’s constantly covering too few workers. Eisenbrey and I recommend setting the threshold at its 1975 level in real terms: $970 per week, the equivalent to an annual salary of about $50,500. It would then be indexed to inflation.
Setting a threshold lower than this threatens to leave too many workers outside the protection of this critical labor standard, established in the late 1930s for precisely the same reasons noted above: to provide vulnerable workers with the bargaining power they lack such that they can work a humane schedule for which they are more fairly remunerated.
It shouldn’t surprise anyone that to do so also makes them and their families happier.