Thursday, July 23, 2015

Overtime pay

The Hill
Today the big issue which came to the fore again is the issue of overtime pay. Democrats want to make it so that companies hire people for more reasonable hours while Republicans claim this will indeed cost millions.

Both are wrong.

The reality of the situation is we are dealing with a free market which is more or less in equilibrium which is what the research has found. The reality is that the market will always find a way to equilibrium, and when regulations like this are put in the market then readjusts to the new situation eliminating the benefits we originally saw. Employers will end up cutting wages back to where employees work the same number of hours for the same pay as they did before. I wish it were this simple to bring people's working hours back to a reasonable level, but it just isn't.

The issue here is we need more employers competing for workers. Labor is not a very valuable commodity, which is part of why we have unemployment. Making laws is not going to change the situation.

There are three ways I know that might be able to reduce overtime hours. One way would be to completely ban overtime altogether, but this might end up reducing the salaries of the employees which would be a cost. Research is needed on this question. A quick Google scholar search does not yield many relevant results.

Another method would be to increase the number of firms. This would force them to compete more for the same number of employees driving the wages up. This will encourage more people to the profession which will fix part of the problem of not having enough people with such skills. A basic principle in economics is that if you have a deficit of a good (such as someone's time they work) than the price is probably too low and not enough people are selling the good. Increasing the wage will attract more people to such professions. An added benefit is if there are numerous firms competing for workers than they will have to offer better pay packages, better benefits, and it is a race to attract the most skilled workers. If I was looking for work as an economist and one firm required overtime and another didn't, my decision should be fairly obvious in which one I would take. We need more companies competing for workers which will effectively raise the wage and decrease overtime in an effort to attract the best workers. The advantage to this is as soon as a firm starts to require its employees to put more time in without adequately compensating them that firm will lose its ability to compete and be a place where the least competent employees will land, making it the worst decision for the firm.

Finally, unions could be useful in decreasing overtime while at the same time keeping wages high through their arsenal of tools like strikes. This is found to be a significant effect of unionization across industries.

That is how we will reduce overtime, simply requiring an increase in overtime pay in the past has not made people better off nor increased costs for employers and there is no reason it will do so this time as well.

Trejo, Stephen J. "Does the statutory overtime premium discourage long workweeks?." Industrial & Labor Relations Review 56.3 (2003): 530-551.
Trejo, Stephen J. "The effects of overtime pay regulation on worker compensation." The American Economic Review (1991): 719-740.
Trejo, Stephen J. "Overtime pay, overtime hours, and labor unions." Journal of Labor Economics (1993): 253-278.

No comments:

Post a Comment