– June 14, 2019
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One of the many problems with people who make decisions for us about how we should live our lives is that they have no principles. Even those who claim to be defenders of free markets have a very weak understanding of what free markets entail. Case in point: the debate in Congress over the overtime rule.

But first a little background on the issue. Under the Fair Labor Standards Act, most employers must pay time and a half for overtime hours (usually understood as hours worked beyond 40 hours per week) for salaried employees who make less than $23,660 annually. Employers only have to track the hours of salaried employees eligible for overtime; salaried employees earning more than this sum have no government-mandated entitlement to overtime pay. This threshold has been in place since 2005 — the last time it was increased.

While it certainly isn’t the place of the federal government to tell employers how and what they should pay their employees, this threshold at least has the merit of causing fewer distortions than would be caused by a much higher threshold.

Enter President Obama. He believed, like most of his fellow Democrats, that many employers are forcing their employees to work long hours without paying them appropriately. His administration claimed that increasing the overtime pay ceiling would compel employers to pay their employees higher salaries, to hire new workers, or give part-time employees longer hours rather than overwork their current full-time workforce. The mandatory overtime pay would, it was predicted, increase the earnings of about 4.2 million workers.

As such, Obama’s Labor Department proposed, and in 2016 adopted, a new, higher ceiling of $47,476 annually. With this increase in overtime ceiling, employers would face an increase in compliance and payroll cost.

Now, I never quite understood the logic that says that if you increase the cost of labor, employers will simply absorb it. What is more likely is that employers, when confronted with higher labor costs, will reduce the number of employees they employ by, say, switching to more automation, or reduce their present investment in the company and hence reduce the growth of future employment in their firm.

The most common way for employers to respond to a mandatory increase in overtime requirements, according to the academic literature, is to cut the base pay of future employees. The bottom line is that employers will not merely passively pay all of their workers more simply because government tells them to do so.

As expected, there was massive pushback by the business and free market community to the proposed change. But of course, logic, commitment to economic freedom, or simply good economics do not carry much weight in Washington, D.C., and, in the end, the rule was adopted. But it was never implemented since a Texas court struck it down in November 2016, arguing that the Department of Labor had exceeded its authority.

Now enter President Trump. You would think that his understanding of the business world and his claim to be all about economic growth and deregulation would encourage him to leave things the way they were.

You would be wrong. His Labor Department, led by Secretary Alexander Acosta, got busy and rewrote the rule to jack up the ceiling to $35,308. This mandatory overtime pay would supposedly increase the earnings of about 1.1 million workers. Obviously, that’s better than the higher Obama ceiling. But that isn’t saying much. In fact, this is like saying, “I oppose increasing the minimum wage to $15 but I support increasing it to $12!”

In fact, during a hearing on the issue, Acosta lamented that “it’s unfortunate that rules involving dollar values can go more than a decade without adjusting,” since “life does get more expensive.”

This move by Trump’s labor secretary shows a profound failure to understand why Uncle Sam shouldn’t interfere with the way employers compensate their workers. It is also clear that Acosta shares many Democrats’ misguided belief that wage levels should be the result of the needs of the employees (life does get more expensive) as opposed to the value workers create for their employers.

The worst part of this policy is that the administration’s lack of principles opens wide the door for the Democrats in Congress not only to introduce an overtime bill that goes far beyond the Trump rule but also beyond even the Obama ceiling. And as expected, they just jump at the chance to do just that. Here is Politico Pro on the new bill:

Four Democrats today introduced legislation that would reinstate an Obama-era rule on overtime pay.

The bill — introduced by Reps. Bobby Scott (D-Va.) and Mark Takano (D-Calif.), as well as Sen. Patty Murray (D-Wash.) and Sherrod Brown (D-Ohio) — would more than double the salary level under which virtually all workers qualify for overtime pay whenever they work more than 40 hours a week. That ceiling, now $23,660, would rise to $51,000 under the bill, extending overtime coverage to more than 4 million workers.

I know that the saying says that the road to hell is paved with good intentions. But in Washington, D.C., and in politics, it is paved much more so with economic ignorance.

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Veronique de Rugy

listpg_veroniqueDeRugy AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.
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