Friday, November 8, 2019

Minimum Wages and Overtime Rules

Perhaps the best-known provision of the Fair Labor Standards Act (FLSA) of 1938 is that it set a federal minimum wage for the first time. In addition, this is the law that established the overtime rle that if you are a "nonexempt" work--which basically means a worker paid by the hour rather than on a salary--then if you work more than 40 hours/week you must be paid time-and-a-half for the additional hours. 

Charles C. Brown and Daniel S. Hamermesh take a look at the evidence on both provisions in "Wages and Hours Laws: What Do We Know? What Can Be Done?" (Russell Sage Foundation Journal of the Social Sciences, December 2019, 5:5, pp.  68-87). They write:
Although wages and hours are regulated under the same law, policy developments and research on the law’s impacts could not be more different between the two areas. The federal minimum wage has been raised numerous times; and many subfederal jurisdictions impose their own wage minima that, where they exceed the federal minimum, supersede it. Perhaps because of this variation, a huge literature examining the effects of minimum wages on the U.S. labor market has arisen and has continued to burgeon. A fair conclusion is that American labor economists have spilled more ink per federal budgetary dollar on this topic than on any other labor-related policy. The opposite is the case for regulating hours. The essential parameters of hours regulation have not changed since passage of the act; and perhaps because of this, the dearth of research on the economic impact of hours regulation in the United States, especially recently, is remarkable.

(In the shade of these parentheses, I'll also mention this issue of the the RSF journal, edited by Erica L. Groshen and Harry J. Holzer, is especially rich in content, including 10 articles on the general theme of "Improving Employment and Earnings in Twenty-First Century Labor Markets." I'll list the Table of Contents for the issue, with links to the articles, at the bottom of this post.)

Minimum Wages

The US minimum wage situation has changed dramatically in the last decade or so in a particular way: a much larger share of workers live in states with a minimum wage above the federal level. Brown and Hamermesh write:
Over the past thirty years, however, states’ decisions to increase their minimum wages have become increasingly important given that the federal minimum has changed less frequently. For example, in 2010 (after the 2007 federal increases had become fully effective) only one-third of the workforce was in states with state minima that exceeded the federal $7.25. By 2016, with the federal minimum still at $7.25, that fraction had risen to nearly two-thirds. As of 2018, twenty-nine states ... had minimum wages above $7.25. States that have raised their minimum wages above the federal minimum have tended to be high-wage states, and the result has been a minimum wage much more closely (though still imperfectly) aligned with local wages.
 Brown and Hamermesh focus on the studies that try to estimate the effects of a minimum wage by looking at these differences in minimum wages that have arisen across states (leaving the issues involved in studying city-level minimum wages for another day). Here are some of the points they make: 

There are basically three ways to take advantage of the state-level changes and variations in minimum wage: comparisons between states; comparisons between border counties of states; and comparisons with states and "synthetic" control groups, which basically means finding a combination of other areas that had economic patterns to a certain state before the minimum wage was changed.

When doing these comparisons, a researcher will want to adjust for other factors that might affect state economies: for example, a natural disaster that hit one state but not another, or a change in the price of oil would affect an oil-producing state. A researcher can allow for each state or border-county to be following its own time trend, or for the effect of the minimum wage on employment to be different in every state. Is the relationship between a changing minimum wage and employment a straight line or a curved line--and if it's a curved line, how curved is it? The more variables like this you include, the smaller the effect of a minimum wages on employment is likely to be. There is considerable disagreement and controversy over what variables should be included.

It's been typical in many of these studies to focus on either teenagers or restaurant workers, because they are both groups that are presumably affected by the minimum wage.

A common finding is that a rise in the minimum wage of 10% raises the wages of teenagers as a group or restaurant workers as a group by about 2%--presumably because some teenagers or restaurant workers were already earning more than the minimum wage and thus weren't affected.

Estimates of the effect of a raising the minimum wage on either employment of teenagers or restaurant workers are all over the place, depending on exactly how the estimation process is done, usually "small"--which in this case means "small enough that the earnings gains caused by a minimum wage increase are only partially offset by employment losses."

Of course, showing that past minimum wage increases had small effects in reducing employment doesn't prove that additional minimum wage increases would also have small effects. The usual belief of economists is that the effects of a rising minimum wage on employment would be small up to some point, but then start getting larger. That point is likely to vary according across states--which is why it makes some sense to have a different minimum wage across states.

At least one recent study has tried to focus on workers age 16-25 who have not completed high school--rather than teenagers in general. There some evidence a higher minimum wage might have a bigger effect on low-education workers in particular, rather than looking at teenagers or restaurant workers.

It's plausible that the effects of a higher minimum wage on employment might be larger in the long-term. For example, perhaps a firm doesn't fire anyone when the minimum wage rises, but instead just slow down on hiring. Or perhaps a minimum wage causes certain kinds of firms to be more likely to exit the market over time, or less likely to enter, or more likely to invest in labor-saving technology. Some studies have found support for these effects; others have not.

For some complementary discussion of the evidence on raising minimum wages in previous posts, see:
Overtime Rules

In contrast to minimum wage laws, overtime rules haven't changed much over time. Brown and Hamermesh write: "In the eighty years since the FLSA was enacted, the specification of its crucial parameters regulating hours—a penalty rate of 50 percent extra wages on hours beyond the standard weekly hours (HS) of forty—has not changed." Maybe the main way it has come up in recent policy disputes is when laws are proposed that employers should be able to give "comp time" for overtime work, meaning extra vacation time, instead of paying higher wages. 

But a big change in the overtime rules has been happening in a subtle way. Back in the mid-1970s, the rule was that a salaried worker had to be paid at least $455/week to be exempt from the requirement to get paid time-and-a-half for overtime. But that $455/week hasn't been changed since then, even though it's value has been eaten away by inflation. Brown and Hamermesh calculate that $455/week was about double the median weekly earnings in the US economy back in the mid-1970s; now, it's about 50% of median weekly earnings. 

To put this another way, it used to be that you had to be earning a salary of double the typical weekly earnings before you were exempt from overtime rules. Now, you can be paid a much lower salary, half of typical weekly earnings, and you are still exempt from the overtime rules. The rules requiring overtime pay thus have gradually come to apply to many fewer workers over time. The Obama administration tried to raise the limit to $913/week by using an administrative rule, but the courts held (reasonably enough, in my view) that this kind of decision needed to be made by Congress passing a law. Apparently the Trump administration has now proposed raising the limit to $679/week.

What would happen if the rules were changed so that dramatically more workers needed to be paid overtime for working more than 40 hours/week? Presumably, some of these workers would get paid overtime, but in addition, employers would try to reduce the number of workers who ended up above that weekly limit. Brown and Hamermesh run through various calculations and look at some international evidence. They write: "We can conclude that increasing the exempt limit would have raised some salaried workers’ earnings and reduced their weekly hours. One exercise suggested that 12.5 million workers would have been affected ..." 

The effects of changing the rules so that more workers are eligible for overtime pay aren't enormous. Still, for workers who are being paid salaries below the median weekly wage, and thus aren't eligible for overtime, it could be a meaningful gain. They write:
If we are interested in spreading work among more people and removing the United States from its current position as the international champion among wealthy countries in annual work time per worker, minor tinkering with current overtime laws will do little. We might borrow from some of the panoply of European mandates that alter the amount and timing of work hours. Among these are penalties for work on weekends, evenings, and nights and limits on annual overtime hours, while lengthening the accounting period for overtime beyond the current single week. If our goal is to spread work and make for a more relaxed society, these changes will help but their effects will also be small.