Earlier today, President Obama rolled out his plan for increasing overtime pay protections for millions of American workers. The president and others have argued that if more workers get bigger paychecks, they will spend more and fuel wider economic growth.
Yet opponents charge that this will prompt employers to lay off workers to compensate for the higher wage costs. That would ultimately stall an already slow economic recovery.
So which scenario is correct?
Economists remain divided. Many feel that the proposed changes would provide exactly what our economy needs right now: greater consumer demand. The other side claims that it would lead to precisely what the economy can’t withstand: more unemployment.
Does this debate sound familiar? It’s almost an exact replica of the heated debate over the president’s other proposal to raise the federal minimum wage from $7.25 to $10.10 an hour. While the minimum wage issue has been held up in Congress, the White House does have the power to rewrite the language governing overtime rules.
As Obama spells out his proposal for reforming overtime pay laws, the two sides are going toe-to-toe — each accusing the other of not understanding how our economy really works.
Let’s consider both sides, starting with the president’s arguments.
Why More Overtime Pay Would Help (and Prevent Wage Theft)
Obama has asked the Labor Department to rewrite overtime pay rules to cover many more salaried workers, such as shift supervisors at fast-food restaurants and convenience stores.
The most common tactic employers use to avoid paying overtime to workers is to designate people as “executive, administrative and professional” employees. Under existing rules, these exempt employees can be denied overtime if they are paid more than $455 a week.
Yet that means that a “supervisor” could earn as little as $24,000 a year, while working far more than 40 hours. In some cases, such a worker could clock enough hours to effectively end up making less than the minimum wage.
The Obama administration also shows that the $455 level was established in 2004, and would be worth $553 today adjusting for inflation.
Supporters also argue that an update of the $455 pay level and a rewrite of the exemption rules could have a significant stimulative effect by putting more money in workers’ pockets for them to spend.
A change in wage, hour and overtime rules “could raise the pay of several million workers who may currently be misclassified as managers,” Jeff Grabelsky, associate director of The Worker Institute at Cornell University, wrote in a statement. “Growing income inequality is a persistent problem in the United States and contributes to anemic economic growth.”
Why More Overtime Pay Would Hurt
According to Speaker of the House John Boehner, expanding overtime pay would hurt the economy. On Wednesday, he told reporters that if employers have to pay more for supervisors, they will cut other positions. The resulting layoffs would have ripple effects that hurt the economy, he claims.
“If you don’t have a job, you don’t qualify for overtime. So what do you get out of it? You get nothing,” Boehner said. “The president’s policies are making it difficult for employers to expand employment.”
Jonathan Meer, an economist at Texas A&M University, concurs with this argument that the White House proposal would increase labor costs, thus resulting in layoffs. “It is likely to slow job growth since, when costs of any kind go up, businesses will adjust” and cut jobs, he said.
Meer said it’s not yet clear exactly which businesses would be most affected, but fast-food restaurants likely would be among those that may have to pay more. “The owner of that restaurant is likely to be a franchisee with a razor-thin profit margin who can ill-afford increases in labor costs,” he said.
But Richard DeKaser, corporate economist for Wells Fargo, said how one assesses the broad economic impact “depends on what you believe is happening in the economy” during this slow recovery.
“If you think the problem is insufficient demand, then increasing pay for workers is helpful,” DeKaser said. “I would argue that that is where we are. At this particular time, programs that increase income will stimulate growth.”
The employment attorneys at Emery Reddy are committed advocates of workers employed in both small and large companies. If you have experienced illegal employment practices— wage theft or denial of overtime pay, misclassification as a supervisor or contractor, other wage disputes, discrimination, wrongful termination, or violations involving FMLA or ADA—we will defend your rights and help you receive the maximum compensation allowed under Washington law.