Obama’s new overtime rules will change business practice. What does they speak to: injustice, inequality or something else?

The July 1, 2015 New York Times Business section carried an analysis by Noam Scheiber on proposed new Overtime rules, Obama Overtime Rule Scratches the Surface in Helping the Middle Class.

Fig 1  Noam Scheiber, New York Times

Obama proposes new Overtime (OT) rules to help to push back the income inequality that has been growing in our country for decades. The Rule raises the threshold for people who may be exempted from additional compensation for more the 40 hours work in any week. These exempt workers are paid by salary, not by time clock records, and are not compensated for any additional work hours beyond the those 40.

Mr. Scheiber’s first comment is very accurate – Obama’s new Rules will have almost no affect on Middle Class income.

This is because it changes how to improve compensation for job related work hours beyond the standard 40  hr/wk. OT pay is not part of a contract, it is fortuitous money that occasionally arrives but cannot be included in a budget.  This rule will do little to nothing to offset the social income pump that shifts money from the lower wage workers into the accounts of the ultra wealthy.

Noam Scheiber ties the lack of effectiveness to the income inequality studies published by Emmanuel Saez and Thomas Piketty. The analysis ends with a solid discussion of what really is needed to begin addressing our ongoing income shift.   We examine his points with observations to underline his basic conclusions. Click any image for full resolution.

Overtime (OT) Pay

click for our discussions on economic inequality

Currently, a salaried worker who makes above $23,660 may be classified by the company as an exempt employee (not eligible for OT pay).  Let’s examine whether a change would make a difference.

The current game   Current U.S. regulations for “full time” employment: 5 day work-week, the employee must work 8 hours per day(40 hours).   The rules, last set in the mid 1970s, are that a full time hourly worker must be paid 1.5 times the contract wage for all time greater than the 40 hrs (“time and a half”).

Permission for a boss to exempt a worker is granted if the job is professional, administrative, or executive, as defined by the federal rules.  Such “exempts” can be made to work additional 50, 60, even 70 hours a week at their standard weekly salary rate.

Box A   Trap for exempt workers

Box A  An example would be an assistant manager at a fast food shop who might earn $23,665 annually ($455.10/wk) and be exempt from OT compensation.  Some exempts are expected to work more than the 22.5 beyond 40 that drives driving the effective wage below the Federal minimum wage ($7.25).
Oh, yeah, this pencils out for some companies.

Comment: time clocks mark in tenths of an hour, and at 22.8 OT hours, the effective compensation is less than Mininum Wage.

The new game   For the Boss, the old game was great, but the new OT rules will cost the companies more.  The boss might shed a tear for the old, but with the new, it is time to sharpen the pencil and look for loopholes. New days now –a new workplace with new rules.

Suppose the “exempt worker” classification threshold were raised by the Department of Labor to its maximum ($50,440/year)  allowed by law.  Some exempt workers will be converted back to hourly and start  OT for the extra hours added, those who are remain exempt would get a salary boost.

Would bosses raise the (approximately) $24,000 exempt  wage to just above $50,440, to avoid paying “time and a half” (1.5 times standard salary) for hours above 40?

Convert to hourly or raise above new threshold?  Decisions … if their base wage and expected OT will cost more than $50,440 a worker should be exempt.

Decision point: the higher the OT, the lower the base wage  For those whose

• expected OT is   5 hrs and Salary is $42,476 (20.42/hr) – give raise.
• expected OT is 10 hrs and Salary is $36,684 (17.64/hr) – give raise.
• expected OT is 23 hrs and Salary is $27,082 (13.02/hr) – give raise.

We think what will happen is a massive declassification of  jobs from exempt to hourly, with few new hires.  The few exempts working near the $50,000 new threshold might get that salary raise.

Afterburner for offshoring   It is just as likely that the move to offshore and outsource jobs will go into hyperdrive.  This will be especially true after Obama’s TPP enabler has kicked in.  Just imagine walking into your local market, asking for the manager, and being handed a telephone connected to a call center in India.  It boggles, doesn’t it?

Saez-Piketty Connection

Fig 2  Fraction of total income earned by the 20% of the population who earn near median income. (light blue, Income of the top 10% of all workers)

Noam Scheiber’s NYT analysis ties this effort to our now-classical Saez-Piketty data.

Fig 2 shows shows that our upper income earners have grabbed ever larger fractions of the total U.S. income from the lower earners, since 1981.

We call this an Economics Zero-Sum-Game, because it considers the totality of all income earned in a year.  The highly rich gained larger parts of that totality, so the less well off lost a balancing share of that totality.

David Brooks calls the “zero sum game” descriptions a kind of class warfare. Maybe commie.  It has been in progress for the past 35 years, we call it the American Slow War.

Fig 3  Source: Wasserman, Bostonglobe.com

Fig 3 is the quickest explanation of this graph we have found.   You don’t need a Nobel Prize in Econ to see what Dan Wasserman has in mind

The standard S-P graph shows the growth in earning fraction for those who make the top 10% of incomes.

This is the 90-100 percentile earnings group; their fraction grew by 50% since 1981.

Easy mistakes with S-P graphs    Time out from our OT post to  discuss a common misconception.

Most commentaries display the top 10% (90% – 100%) because the trendline is relatively smooth. Finer fractions of the pooled income have fewer members and statistical issues make the line much more jagged. Before any guillotines are hauled out, break this top 10 percentile into subgroups and notice interesting difference.

• The 90-95 percentile (income of $135,000  to $180,000) income share has been  flat  after 1993.  No gain or loss of  income fraction.
  

Their income share did not follow inflation and it became harder and harder to send children to college and support a summer vacation cottage. We feel their pain.

In fact, the upward growth we see in Fig 2 is mostly due to the very top 1% of all earners (99-100 percentile).

Fig 4  Share of total income by the top 1/10,000 of all income receivers. The red lines are to visually guide the pattern

Maybe, but our 0.01% Ultras display the biggest percentage gain of total income. See Fig 4.

• The top 0.01 percent of all earners  (99.99 through 100.00 percentile) income fraction grew by a multiple of 5.   (These data cover 1912-2010, and will be updated through 2013 in a later post.)

Noam Scheiber analysis mashes together everyone in the “top 10%,” but this is a small issue in his perceptive report.

A Political Interlude

The 2016 presidential election is rarely far from a discussion of the growth in American inequality.  Mr. Scheiber discusses liberal politician’s dilemma, since the Rightist view seems to be  there ain’t no such thing.

Fig 5  Sen Chuck Schumer

Charles Schumer  Sen. Chuck Schumer (D. NY) is all for the OT Rules.  He calls them “… the middle-class equivalent of raising the minimum wage.”

Schumer is right that the Rules are important, but obfuscates with “middle class” (see discussion in our next section).  And he misses the difference between a regular-and-recurring “wage” that is the basis of a family’s resources and a “one-off” payment that cannot be relied on for support.

He does say that substantially raising income will require a more robust agenda.

Fig 6  Sen. Hillary Clinton

Hillary’s dilemma    Mr. Scheiber quotes the leader of a Hillary Clinton presidential advocacy group as saying “It becomes very sharp after 2000.” This in reference to the S-P inequality signature of Fig 2.

This is like the guy who wakes up smelling smoke and hurries from the hotel. Then the building burns down, incinerating other guests.  He says “I just went out for walk. It happened after I left”

Hillary is all for the OT Rules, but she really must develop an explanation of why S-P inequality grew under Bill’s (and Hillary’s) watch.  Wasn’t she providing council?  Just baking cookies, maybe?.

Fig 7  Sen Bermie Sanders

Bernie Sanders is running for the Democrat presidential nomination. He is also for the OT rule, but thinks it will not help inequality all that much.

Scheiber ends his article with a quote from Senator Sanders (D VT).

“What I’m going to say to the top 1 percent and the top 0.1 percent is ‘Sorry, you have to pay your fair share of taxes.” … “The American people do not look kindly on a society where they can’t afford to send their kids to college and the richest people in the country become phenomenally richer.”

Obama, Overtime Rules and Saez-Piketty Inequality

The OT rule is for the “Middle Class” (MC).   Mr. Scheiber refers to the MC but does not define it, nor does Chuck Schumer.    When Pres Obama says MC, he means a sub fraction of those earning $23,400 – $50,000. Then he urges the TPP “free” trade agreement to help the MC (benefiting corporate board of directors with incomes $400,000 – $10,000,000).  Not the same people, not even close.

Middle Class is an emotional idea, not an economic one.  People talking about things for the MC, are really meaning things for “all us real guys here.”

The  OT Rule may not help much.   And, it might cause higher growth in inequality.  It actually addresses feelings of injustice, not the actual inequality.  But it may be a step toward raising the minimum wage, and reinstating the progressive tax system.

Perhaps Mr. Scheiber is right, and this is coming forward right now as a little bit of sugar to help the bitter TPP go down.  It will not offset the damage about to descend on us with the advent of the TPP.

But it does shift 2016 election rhetoric toward the inequality topic. That would be a good thing.

……………………………….

Charles J. Armentrout, Ann Arbor
2015 July 5
This is listed under Economics    thread    Economics > Inequality
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