Of course, the president and Mr. Bernstein's confidence notwithstanding, it's not really a question of whether all workers are happy about this or not. Some will be happy and some won't. There are a lot of activists in the Democratic Party that will not be affected by this policy who will be slightly more motivated to support the party, because they will consider this a victory. Among those affected, there will surely be a decline in support ("What's the matter with Kansas?" the activists will ask.) Some portion will be less happy with the new pay and time schedule than they were with the old one. And, there will be no question where to place the blame for the change, since the supporters of the policy are quite proud of themselves. The idea that some number of workers will be happy appears to be based on the notion that the base wage will remain unchanged and that the overtime premium will simply add to the worker's compensation. Nominal rigidities in wage markets may prevent employers from immediately simply docking the base pay to resettle back at the original total cost, but even in the best case scenario, for a worker who might be averaging 50 hours, a few changes to work requirements and some reductions in planned pay increases would re-establish the total compensation cost fairly easily. For workers who have been salaried, wouldn't we simply expect the new hourly wage level to be set so that the total compensation level remains unchanged, but now the employee and the employer have to deal with a discontinuous 50% cost factor in their weekly production plan?
The oft-heard description of departures from arbitrary wage rules as "wage theft" is a particularly useful rhetorical weapon in the cause of replacing open economic discourse with hatefulness and pop-moralizing. This issue is a great example of the "curious task of economics". The combination of an interventionist bias and confidence in a particular world view can be dangerous. Here we see the sort of Marxian priors that inform so many progressive attempts at helping - the idea that power imbalances are the overwhelming factor in price setting, the idea of just prices and just wages, the idea that employment contracts are generally exploitative, especially for low wage workers, etc. Supporters imagine that a given set of voluntary labor arrangements must be skewed in favor of the employer. People don't like to work more, all else equal, so it is not hard to imagine that they are coerced, due to their lack of negotiating power, into working more than they would prefer. But, it is not difficult to imagine other explanations. In fact, simply asking workers would provide many reasons - Meyer and his workers, for instance.
One obvious reason workers might prefer a salary arrangement with some uncompensated overtime is management of income risk. One of the fundamental services employers provide to employees is the assumption of tentative risk - volatility in income from seasonal or cyclical fluctuations in sales. If one approaches this subject with the bias that employment arrangements are exploitative, these sorts of obvious issues may not be so obvious. This change in policy will put many workers in the position of meeting regular fixed expenses in their household budgets with earnings that will now come in fits and starts, depending on the work load of their employers. In fact, I would expect total compensation to rise slightly as a result of this policy change, because this sort of income management is very valuable to workers, and is costly for employers. The fact that this policy prevents employers from providing this income smoothing service to their employees means that employees will require some compensation, and employers will be willing to pay it. But, the marginal worker will be worse off for this change, even with the higher compensation level.
Of course, we hear all the time how insecure workers are - how employers are increasingly forcing unpredictable and unsustainable schedules on them. With a worldview that views labor contracts as exploitative and imbalanced, this can be blamed on employers, almost by definition. And, even though it seems obvious that imposing hourly pay with overtime rules on salaried workers would exacerbate the problem of weekly wage insecurity, this problem can simply be assumed away through an imagination blinded by its own assumptions. So, one can believe that, not only does an imposed, arbitrary 50% discontinuity in wage rates for hourly workers have nothing to do with short term wage insecurity, but employers who avoid imposing it are engaged in Wage Theft.
Corporations aren't capturing potential wages.
The idea that workers will get a raise from a policy like this also comes from this sort of worldview. This chart from Mian and Sufi has become a sort of mascot of the idea that corporations can capture huge gains by underpaying low wage employees - "The Most Important Economic Chart". The idea is that the median worker has not been granted their portion of productivity growth since 1980. (The trend shift looks like it happens in about 1969, but Mian & Sufi, oddly, set the indexes = 100 in 1980, where the median income series looks like it is already below the productivity series by at least 10 points, relative to 1969.)
According to Mian and Sufi, the two reasons are:
First, owners of capital are getting a bigger share of GDP than before. In other words, the share of profits has risen faster than wages. Second, the highest paid workers are getting a bigger share of the wages that go to labor.There are some other issues, such as number of earners per household, that have significant effects here. But, for the purposes of this post, I want to concentrate on the two factors M&S mention. I have posted a lot about the growing returns to risk and skill, among both capital and labor. And, in fact, I think M&S's second factor is very important. After adjusting for other factors they don't mention (like household size), high incomes of digital entrepreneurs and changes in distribution of labor income explain basically all of it.
So, it's a problem that they mention this first factor, that capital is getting a bigger share of GDP. It's simply not a significant factor. But, because M&S, Picketty, and other observers keep inserting this notion into the consciousness about this issue, this labor vs. capital mindset creeps into all sorts of issues, like this overtime pay policy issue. It feeds this idea that corporations, in the aggregate, have immense power to claim producer surplus. When proponents of these sorts of policies can't imagine that laborers collect any of the producer surplus, they don't have to be concerned about the effect of their policies on producer surplus, because they see the elimination of producer surplus as a virtue. So, these policies end up destroying producer surplus, and if in reality much of that is going to labor (which I think is true), then these policies end up cutting the incomes of the laborers they are intending to help. Proponents can't imagine that current labor agreements have developed to meet laborer's intrinsic marginal demands, so they end up making it illegal for labor agreements to meet laborer's intrinsic marginal demands.
Here is a graph of compensation and of capital income as a portion of GDI. Capital includes all returns to ownership (profit, interest, and proprietor income). They are very stable over time. Looking at the M&S graph, median family income looks like it is more than 40% below where it would have been if it tracked their productivity measure. So, I have included three indicators in this graph:
1) The range of actual capital income since 1980 (Blue).
2) The trajectory capital income would have taken if labor income had declined by 40% since 1980 and this was explained by increased capital income (Red).
3) The range of capital income that would be required to increase compensation by 10% through policies that transfer income from capital to labor (Green).
First, there is a very tight range of relative total capital income over time, even through business cycles. Overwhelmingly, total compensation correlates with GDP growth. Real compensation per laborer since 1980 is up around 60%, while incomes as a proportion of GDI move in very tight bands. The top dark orange line adds homeowner implicit rent to compensation. Even the small decline in compensation since 1980 has very little to do with wages, but instead is related to housing issues.
The housing supply problem tends to benefit high income households at the expense of low income households, and, as I mentioned, there are plenty of ways we might look at how compensation is distributed among labor. But, since this idea that corporations are somehow capturing a bunch of surplus from laborers is so enticing, policy fights about ways to help low income households keep being waged about a problem that doesn't exist.
The red lines show how much capital income would have grown if it had been responsible for the missing household income from M&S's graph. We would have noticed.
If a low-level salaried laborer working 50 hours a week was paid overtime on those 10 hours with no other change in wage level or hours worked, this would represent about a 10% increase in compensation. The green lines show where income to capital would have to go if this could actually happen - if we could engineer a 10% wage increase through public policy. Since the BEA began tracking incomes in their current format, going back to 1929, capital income has never fallen in that range. This simply isn't a potential source of labor income. Impositions like overtime pay regulations simply force laborers into second-best wage arrangements.
A portion of the Washington Post article reads:
Especially in weak labor markets, there’s lots of anecdotal evidence of people having to accept work schedules that make it impossible for them to balance work and family, completely vitiating those pristine “equilibration” assumptions.
Hamermesh et al also talk about “rat race” models “in which workers put in sub-optimal excess effort to distinguish themselves from slightly inferior workers.” I myself have worked in offices where if someone sees you leaving at five, they look at their watches and shake their heads. Again, in such cases, the classical assumptions do not hold.
So in the real world, many people don’t choose their hours of work. Moreover, the folks with the most flexible schedules tend to have the highest incomes, which is again upside-down when you think about who has the toughest time balancing work and family
Anecdotes don't prove market failures.
There are lots of stocks that lost more money than the market indexes did last year. There are lots of stocks that did a lot better than the indexes. Neither of these outcomes overturns the efficient market hypothesis. In any market outcome, there will be examples on both sides of a distribution. A question to ask yourself would be, would an anecdote from the other side of the distribution be a convincing argument for a biased market? What if Bernstein had said, "Look we all know people who shirk on the job. We all see workers standing around at work sites or surfing Facebook at work or who go golfing on Friday afternoons. Clearly workers should be working more. So much for those pristine 'equilibration' assumptions." Outcome variance could, in some cases, signal the opportunity to improve efficiency through better information and more precise individual price-setting. But, it is not evidence of biased outcomes.
The fact that Bernstein chose to work in an office where part of the complex set of communications and expectations included an expectation of working past five may tell us something about Bernstein's personal choices, but it doesn't tell us anything about biases in work schedules. In fact, most workplaces are divided between salaried and hourly jobs, where everyone knows the tradeoffs between those career tracks. And, between workplaces or job types, even within salaried career tracks, there are myriad different tracks with different work expectations. The existence of some tracks which call for more hours than some others says nothing about a bias in any direction. The existence of so many different careers with different characteristics suggests otherwise, unless we just consider any constraint that employers carry with them into the complex set of ongoing negotiations about typical labor contracts to be a bias. Is our baseline for a balanced life painting landscapes for 3 hours a day, and then meeting friends for tea, and any deviation from this is a bias imposed by corporations on our ideal work-life balance? Surely Mr. Bernstein had options for hourly work that he could have taken in lieu of having those co-workers glaring at him at 5pm. Have we come to a place where the existence of tradeoffs is considered a market failure?
At the base of all of this is the reality that if workers would work less if they could, in the aggregate, then they would also earn less. There is no way around it. And, there are significant life cycle issues with career tracks. Even if the workers who are putting in the longest hours are the ones who report the least satisfaction with their work-life balance, this is not a sign of bias in workplace trends any more than the high satisfaction of the 60 year old playing golf and going on cruises is a sign that we don't work enough. We make tradeoffs with ourselves, our employers, and our families. We are rarely at the margin. Bernstein says that many people don't choose their hours of work. They don't personally negotiate the price of paper towels or the size of roasted chickens, either. What does that have to do with market failures?
Work weeks have long been declining.
And, since workweeks have been declining without tweaks in overtime labor rules, doesn't this suggest that labor trends incorporate worker demands without political coercion? But, low income workers work the most, right?
The red line above is for all workers. The lower blue line is for production and non-supervisory workers. Here is Gallup data about workweeks. Workweeks increase with income, education, and and age (until retirement). This graph suggests that a large majority of the workers that would be covered by the new rule change don't work overtime, even without these rules. And the trend is for more leisure time among low income and low education workers.
And, self-employed people work longer hours than employees. All of these data suggest that there is significant value in long workweeks and that less productive workers are already engaged in an emergent set of negotiations setting norms for work-weeks which lead to shorter workweeks for employees, especially less productive employees.
I just find this to be astonishing. There is a strong and clear correlation between people having more choices and control over their lives and people choosing to work longer. And, the Obama administration and its supporters are specifically targeting the categories here that have the shortest workweeks, and they are making it illegal for them to choose the work-life balance that everyone else is choosing. For those who earn below average wages, the Obama administration wants to put a 50% surcharge on their choice to work harder, even temporarily, to earn more money or to prepare for a potentially more rewarding career path.
I suppose those unbalanced, problem workers who are drawn to long work schedules (I mean, not as long as, say, your typical Washington Post columnist or White House staff, but still, I'm sure, too long for a healthy life balance.) could just become self employed.....well, if they don't need a license for their occupation.
One More Question About Market Failure
Why is this a presumed market failure to begin with? If workers really don't want to work more than 40 hours, and if this overtime surcharge would cause employers to limit their hours and hire more workers, why wouldn't employers already be doing this? What kinds of Dickensian hellscape do we work in that employers are widely forcing workers into job descriptions with more hours and more income those workers want, when they could hire more workers, and have a more healthy and happy labor force?
Here's another Bernstein piece for the Economic Policy Institute:
These provisions are important for covered workers, including 75 million hourly-wage workers, who value having a 40-hour workweek and earning extra pay when they work overtime. The right to a limited workweek provides time for leisure, civic participation, commuting, self-improvement, and tending to family and friends.You have "the right to a limited workweek". Put that in your pipe, huh? There are debates about positive rights and negative rights. I'm not sure what category this fits in. How about imaginary rights? The square root of a negative number. Seems about right.
As Meyer points out, the junior management positions that might be moved from salary to hourly because of these rules are a typical stepping stone for low income, less educated workers to move into managerial career tracks. All of the subtle signals involved in the difference between hourly workers and salary workers are an important, emergent part of the ongoing discovery process between workers and employers. Overtime policy supporters can't imagine that low income workers want these choices, so those workers are stuck with these imaginary rights - the right not to do what most high income workers did do, but that some have decided low income workers shouldn't do.
This is the subtle problem that comes from the oppressed-oppressor paradigm that Arnold Kling associates with the progressive point of view. Bernstein, for instance, has been confronted with many choices and tradeoffs in his life - some more difficult than others - some difficult enough to induce guilt or doubt. One of the trickiest tradeoffs is work-life balance. The life cycle of a modern American spouse/parent/worker has a peak in time demands in the 25 to 45 age range. All of these factors are pulling at us. We have a natural inclination to feel and show support for our families, so the work portion of these demands does not enjoy a rhetorical bias. So, when we settle on our priorities, we naturally have a rhetorical bias against our work demands, and we sincerely have misgivings about choices we make that favor work. These are difficult choices, not least of which because sometimes choosing work is in the best interest of our families, even when that means we sacrifice some of the other demands our families have on our time. But, this is "near" stuff, as Robin Hanson would describe it. This is the context of reality and tradeoffs. So we make our decisions, and we carry the consequences in our consciences, never knowing if we chose correctly.
Where the oppressed-oppressor paradigm comes in is that this allows us to look at other people and remove those tradeoffs from the picture. Jared Bernstein worked long hours because that was the difficult tradeoff required to be a sought after voice in the halls of power. But, we can imagine low income workers as oppressed, so that their decisions are not based on tradeoffs, they are based on demands which we can presume those workers had no means to negotiate. Removing tradeoffs from the picture pulls us away from the insights of economics, which deal with the difficulty of accounting for, or even knowing, tradeoffs. And, it pulls us from the "near" to the "far", where we can imagine that reality is shaped by our ideals, instead of the other way around. So, this paradigm, which begins with a sincere desire to empathize and help marginalized people, ends up creating a sort of elitism. They are different than us, so we need to impose our ideals on them.
And, our ideals are imposed in a way that we would have never stood for in our own lives, lived in the "near". A 50% jump in cost is huge. There are arguments on the margin about 5% or 10% increases in the minimum wage. But 50% is clearly not a cost factor that firms can simply swallow. So, it is very common to see workers who have employers that are obsessive about keeping their hours under 40. In the "far", 50% increases in cost don't have tradeoffs. They are just a means to capture income from employers. For many workers, who must live in the "near", this is effectively a ban on overtime, and to the extent that it extends the barrier between hourly and salary positions, it is a glass ceiling for workers who don't carry a set of credentials that pushes them over the threshold.
Supporters tell themselves it's for the best. We had to live our lives in the "near". It's refreshing to manage the lives of others in the "far". The President's most recent announcement of the new rules contains no hint of the "near". His world is the world that lies above accountability. There are no tradeoffs - it is only greed and moral weakness that prevents us from creating the ideal world he imagines that we should. The difference between high wage jobs and low wage jobs simply reflects the moral standing of the employer. Employees are innocents, helpless but for the "hard work" of the social justice brigade. And they will right this moral wrong by...instituting a 50% surcharge on employers of low wage workers who work a minute over 40 hours a week and putting obstacles between low status workers and salaried career paths.
This is why it is strange to associate progressivism with liberalism. This is more akin to the worst sins of conservatism - the tendency to ascribe moral import to those things we most strongly choose not to understand. Someone might take issue with some of the inputs that inform my pushback on this policy. The President's rhetoric doesn't rise to that level. It couldn't. It lives in the "far". To acknowledge debate - to enter the "near" - would undermine the position itself. This is a cue to listen for when supporters of this rule speak, to separate the serious from the sectarian. Bernstein's position might be wrong, but the President's rhetoric is simply banal.
So, by assuming income mobility away, we ignore the cost of policies that destroy the seeds of that mobility. Why can't the working poor accept that they have no ability to manage their own moral agency and that there are certain arrangements we can't let them accept? Is being kept in your place with misplaced pity any better than being kept in your place with misplaced disdain? Maybe that's the question Kansas was answering when we wondered what was the matter.