The New Employment Contract Diktats From the Department of Labor

By Don Boudreaux

Obama administration operatives – along with a seemingly growing number of other economically uninformed people – think that the terms of employment set in real-world markets are not only arbitrary but arbitrary always in ways that unjustly harm workers and yield unjust benefits to employers.*  People who think in this way, in addition to having no theory of employment-terms determination more refined than “workers poor, powerless, and good; boss-men rich, powerful, and bad,” thus imagine that the state can easily and unambiguously improve the well-being of workers by arbitrarily dictating changes in one or more of these terms of employment.  Employers, it is apparently presumed, will bear the full cost of these additional worker benefits.

This jejune and economics-free notion of reality is held by those who wield genuine power today in Washington.

In today’s Wall Street Journal, my superb former student (and currently economics professor at SUNY-Purchase), Liya Palagashvili, and I have an article on the Department of Labor’s absurd pending new diktats that would greatly expand the number of salaried workers forced to suffer the “protections” of the Fair Labor Standards Act’s mandated overtime-pay provisions.  This article summarizes some of the findings in our study, “An Economic Analysis of Overtime Pay Regulations,” which was released earlier this week by the Mercatus Center at George Mason University.  Here are two slices from our WSJpiece (which, I add, is the product mostly of Liya’s eloquent – and not of my pedestrian – pen):

In a new Mercatus Center research paper, we analyze the likelihood that the new overtime-pay rule will promote any of the stated objectives. We find that the Labor Department overlooks the most likely response by employers—namely, to cut employees’ base salaries, when feasible, in reaction to the overtime regulation. Empirical studies reveal little evidence that overtime-pay regulations result in greater pay or more employment.

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It is irresponsible and unethical of the Labor Department to emphasize only the potentially positive consequences of government-mandated overtime pay. Employees should be aware that while it’s possible that this regulation will increase their pay or reduce their work hours, the more likely outcome is that their base pay will fall, and they’ll lose many of the perks that come with not having to punch a time clock.

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During a Capitol Hill event yesterday on these pending DOL diktats, it was suggested by a lobbyist for a partnership of employers who rightly oppose these diktats that labor unions support these diktats because these diktats will ease unions’ efforts to organize workers who are currently salaried.  The diktats might have this effect because, as Liya and I explain in our Mercatus Center paper, one effect of these diktats will be to reduce the flexibility that affected employees have to telecommute or to otherwise work off-site.  Having workers consistently all in one place – at their respective job sites – might well make it easier for labor unions to organize them.

I’ve no idea if this above-explained effect is genuinely one of the motives behind labor-union support for these diktats, but the possibility is plausible.

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* A somewhat more sophisticated version of the “workers poor, powerless, and good; boss-men rich, powerful, and bad” theory of employment-contract terms is one that relies on hypothesized market imperfections.  Yet in addition to giving to textbook models of market perfection a descriptive and normative role that they were never meant, by sensible economists, to have, people who point to alleged real-world market imperfections to justify government “correction” of such imperfections amazingly ‘find’ that the market errs almost always on the side of employers and never on the side of workers.  But why would there be such a one-sided bias?  Why do imperfect information, “frictions,” and other alleged sources of market ‘failure’ always favor employers and never employees?  Seems odd.

The above originally appeared at Cafe Hayek.