A new rule from the Obama administration, which will increase the fraction of workers entitled to time-and-a-half overtime pay, is likely to increase total employment in the U.S. in 2017 by about 100,000 jobs, according to Goldman Sachs.
The idea is this: Companies whose workers are covered by the rule will try to avoid paying overtime, and they will hire additional workers in order to do this. The point is to keep from asking their existing employees to work more than 40 hours a week.
The rule change affects salaried “executive, administrative and professional” workers, who can currently be exempt from overtime pay if they make as little as $23,660 a year. Following implementation of the rule (expected in December) the overtime exemption will apply only to salaried workers making at least $47,476 — making 4.2 million additional Americans eligible for time-and-a-half.
Of those, in any given week about 1 million actually work more than 40 hours.
There are three ways employers may respond to this rule change:
- Simply making the overtime payments.
- Reducing employees’ base pay, in an effort to leave their total compensation unchanged after the new overtime payments — though this can be complicated, especially because the employers don’t always know in advance how much overtime each employee will work.
- Employing more workers and have them work fewer hours, so they do not run afoul of the 40-hour limit.
By examining employer behaviour from the last time the overtime threshold was changed, in 2004, Goldman economist Alec Phillips developed a “central” estimate that 100,000 additional jobs will be created in 2017 as employers choose the third option — not a huge amount in an economy creating between 2 and 3 million jobs a year, but not trivial either.
It’s important to note, employers who respond to the new overtime pay rule by reducing overtime hours will not be “cheating” or skirting the intent of the rule. The point of the rule is to ensure that lower-income salaried workers get compensated if they have to work extra hours; allowing those workers to collect their salaries without working uncompensated overtime is a meaningful gain for those workers.
The new time-and-a-half payments would also increase some workers’ hourly pay, but not for enough workers to show up in the statistics of average hourly earnings, according to the Goldman analysis — so don’t expect this rule to drive a boost in wages that can be felt at the economy-wide level.