Stronger Overtime Rules and Job Creation

If I told you that the legislature of State X is going to make it easier for workers in the state, including public employees, to earn overtime pay, you might wonder what effect that would have on employment in the state. What if the cost to employers from having to pay more workers time and a half for overtime is so high that it causes businesses to move to a neighboring state that has a weaker requirement? Or what if it raises costs and employers respond by laying off employees?

Those fears are being raised by groups like the National Retail Federation, the Heritage Foundation, and the CATO Institute, all of which oppose President Obama’s plan to revise the Fair Labor Standards Act regulations that govern the right to overtime pay. The president wants to make it easier for relatively low-paid employees to earn overtime pay when they work more than forty hours in a week, but the conservative business lobbyists are already yelling about job loss—with no real explanation or evidence that job loss is a realistic outcome.

Fortunately, California provides a kind of natural experiment about what happens when more workers have a right to overtime pay, and the results are reassuring. Regardless of their job duties, California law guarantees overtime pay to employees earning less than $640 per week, while its neighboring states—Arizona, Nevada, and Oregon—only guarantee overtime pay to workers paid less than $455 per week, less than a poverty level wage for a family of four. Other rules in California make it harder for employers to deny overtime pay to even better paid workers whose jobs include duties that could be considered managerial or professional. In California, but not in its neighboring states, an employee has to spend a majority of his time doing managerial or professional work in order to be excluded from the right to receive overtime pay.

So have businesses, and especially retailers and restaurants, cut jobs because their assistant managers and chefs have to be paid for their overtime hours? I see no evidence that that has happened in California, which has been creating jobs at a faster pace than the nation as a whole.  In fact, since the Great Recession, California has replaced all the jobs it lost while its neighbors all lag behind. Arizona’s employment is 4.8 percent lower than in December 2007, Nevada’s is 6.2 percent below, and Oregon’s is still 1.2 percent lower.

I am not suggesting that California has recovered faster because it guarantees overtime pay to more of its low level managers, but clearly, the evidence doesn’t support an argument that California’s stronger overtime protections have hurt employment. In theory—and this was a key rationale for the overtime law when it was first enacted in 1938, higher overtime pay encourages businesses to spread employment among more workers and thereby reduces unemployment. Rather than two employees working 60 hours a week, it would be better to have three working 40 hours, and requiring an overtime premium provides the incentive.

In Nevada and Arizona, but not in California, employers have an incentive to schedule $500-per-week managers to do 60 hours of work because they aren’t entitled to overtime pay or even the minimum wage for the 20 additional hours. In California, any manager earning less than $640 per week would have to be paid time and a half for every hour beyond 40, so rather than having their “managers” stock shelves and work the cash registers, retail stores are more likely to have hourly paid clerks do that work.

Given the difficulty many employees have in getting enough hours of work each week (7-8 million employees are working part-time but want full-time work), it’s a clear benefit to them to have front-line work done by hourly workers who will get paid for it rather than by managers who work without additional pay when they work more than 40 hours in a week.