August 30, 2019 10:30AM

What’s the Point of the Overtime Pay Regulation?

The Trump administration will reportedly raise the overtime pay salary threshold from $23,660 to $36,000 in the coming weeks. Anyone below the current threshold is eligible to be paid at least one-and-a-half times their regular wage for any hours worked above 40 per week. The proposed change would make approximately 1.3 million extra people eligible for overtime pay.

Economically, such a regulatory change is a great big nothing burger. It will do nothing to affect long-term overall compensation, but will bring mild labor market dysfunction and adjustment costs along the way.

Yes, in the short-run, employers have business practices and contracts with their employees that take time to change. Some workers will therefore benefit from higher total compensation in the immediate aftermath of the rule change, as employers are now legally obliged to pay them extra for overtime. This, no doubt, will be the outcome the Trump team trumpets.

But as time goes by, employers will adjust.

That might come initially through managing their workforce to minimize the likelihood of paying overtime rates - changing shifts patterns, recategorizing workers into exempt categories, outsourcing tasks, or trimming the workforce. Basic economics tells us, though, that what employers ultimately care about are the total costs of employment. In time, the overwhelming response will be employers cutting base pay rates or other perks and benefits (relative to where they would have gone) such that overall employment costs remain unchanged. This is exactly the response that empirical research has found.

So the broadened scope of the rule will do little for workers beyond the short-term. But we’d expect it to modestly reduce the efficiency of the economy in other ways. For example, more employers might decide to spend time tracking their employees’ hours closely, disallow “working from home,” or adjust contracts towards hourly wages that are less appropriate for the nature of their industries.