An Economic Analysis of Overtime Pay Regulations

Abstract

This paper examines the US Department of Labor’s proposed regulation to extend overtime pay to employees with base salaries of $23,660 to $50,440. We find that the department provides no evidence that an “underpayment” or “overwork” problem exists in the United States. Nonetheless, we evaluate the stated policy objectives. The Department of Labor indicates that the proposed regulation will meet three policy objectives: spread employment, improve worker health and well-being, and increase wages for employees. We find problems in the theoretical mechanisms by which these policy objectives are to be met and conclude that those mechanisms are not supported by economic theory. Furthermore, in a review of the empirical literature, we find no empirical support for achieving any of the policy objectives. That is, there is neither theoretical nor empirical support that the proposed regulation will meet its stated objectives; in fact, evidence suggests that moonlighting may increase in response to regulations. Finally, we anticipate that the proposed regulation would have a structural impact on the economy because salaried jobs may turn into hourly wage jobs. We believe such a shift will have a negative impact on certain labor contracts that would be ill suited to hourly pay—specifically, technology start-up and telecommuting jobs. Given that the birth of start-ups is on a decline and the death of start-ups is at a peak, we believe it would be unwise to further hamper the technology start-up market by adopting the proposed regulation.