Hollowing Out the Middle Class

The White House continues to demonstrate its inadequate strategy for growth and middle-class success with more regulations directly impacting the labor market. News reports are indicating that the administration will issue its long-awaited changes to federal overtime pay regulations this Thursday. The Department of Labor's (DOL's) new regulations aim to expand the number of workers who are entitled to receive time-and-a-half pay for working over 40 hours per week. While the White House claims this change is a lifeline for the middle class, the reality is that these new rules will hollow out the middle class and likely increase inequality in the workplace.

The most substantial of DOL's rule changes is the increase in weekly earnings that salaried workers must receive in order to be exempt from overtime pay provisions from $455 to $970. This means that any year-round salaried worker earning less than $50,440 annually will be entitled to overtime pay, a substantial increase from the current $23,660 threshold. What the administration continually fails to see is that the costs of regulations like these have to come from somewhere, and it's usually from the people it aims to help.

For instance, let's take restaurants and retailers, which have a large number of first-line supervisors who would be subject to the rule change. The economic advisory firm Oxford Economics examined the implications of raising the salary threshold in these industries. The research found that due to the high market competition among restaurants and retailers, businesses generally would not be able to pay for the additional overtime costs by raising prices. So, whenever an employee would get a raise from the change in the overtime rule, he or she would not be better off because the employer would offset the higher cost by cutting benefits, base pay, or hours.

Moreover, Oxford Economics examined what would happen if the weekly salary threshold were raised to $984. For some workers to remain exempt, employers would raise their pay by an average $1,800, only to have their benefits cut by the same amount. Other workers would be converted to non-exempt hourly employees and would receive an average additional $11,700 per year in overtime. That seems great except their base hourly pay rate would be sliced by the same amount, leaving them no better off. Finally, some unlucky workers will move from salaried to hourly and see their hours fall to 38 per week. As a result, this group would lose about $2.73 billion total. To make up for the lost hours, employers would hire part-time workers.

What part of this actually helps the middle class? None of it. With fewer salaried workers and more part-time jobs, there will simply be fewer entry-level management and professional positions. Meanwhile with fewer entry- and mid-level salaried opportunities available, senior level workers will have to take on more responsibility, which could result in higher compensation at the top. With middle-class jobs becoming less common, inequality in the workplace will rise.

This administration is no stranger to regulations. In President Obama's "Year of Action" alone, the White House imposed $181.5 billion in regulatory costs. While rules like overtime pay standards hurt those they are purported to help, these regulations cumulatively stifle strong economic growth. Unfortunately, it appears that the White House has given up on economic growth as the president's own Office of Management and Budget projected the U.S. economy will grow a dismal 2.5 percent on average over the next 10 years. The top policy priority should still be to enhance growth prospects, but rules like overtime pay continue to make that a distant dream.