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As a labor economist, I am very much excited any time we see a policy change that enables us to do some research into hitherto unanswered questions. The rolling-out of the new overtime pay rule would seem to be one such option. One reason the administration is pushing for the rule is akin to the reason for the French maximum hours rule – the hope that employers will “spread the employment wealth” around. That seems a strange request when unemployment is near historical lows and may in fact be at its “natural” rate.

But I digress.

This rule is going to give us a chance to see how productive firms think low-paid salaried workers really are, at the margin. If, as expected, many of these workers will be converted to hourly rates, the idea was that firms would not want to pay 1.5x salary to these workers for the valuable work they are doing over 40 hours right now.  Do we really think that the 41st, 42nd, etc. hour of work done by low-salary yet salaried workers is producing all that much value, at the margin, for firms? We now have a chance to test it. First we can see how much firms are going to cut back on salaried work. Second, we can see whether firms end up replacing the now costly 1.5x wage time with another worker who earns 1x wages to do that “marginal” work. My priors of course, from personal experience, are that those marginal hours are not productive at all in the marginal sense, even though from an organizational capital sense they may be very valuable on average.

Thus, this new OT rule is going to blunt the development of organizational capital and it will certainly put employers’ money where their mouths are. If the work being done at the margin by these newly “helped” workers is in fact worth something, we should see a surge of new hiring by firms. Lest you be surprised by my thoughts on this, my H-not is that the effect will not just be small, but likely zero. Look around you at your firms for people earning less than $50,000 but who are on salary. How valuable is much of the work overall on average? Compare that to what you think the value of the marginal hour of work is? I have first hand experience – I do not think anywhere near by marginal hours are adding value to my employer – after all, I am writing this over lunch in my office here on campus … it’s a pretty worthless post.

So, in regard to the new OT rule (and there is lots else to be said about it) I am making three predictions:

  1. Firms will NOT expand employment to replace the work done by former salaried workers
  2. Existing salaried workers who will be moved to hourly are NOT going to like it – and if they read the text of the rule carefully they will recognize that they really can’t be made better off by it.
  3. Given 2, and what I think I understand about psychology … these worse off workers are going to blame … their … greedy … employers … for this! You just watch. I am sure my own university which has lots of workers falling into this affected category, is going to have workers get very angry at the University for “doing this to them.” How all of that frustration is not aimed at politicians I will never understand. One can only shudder to imagine what policies these newly frustrated workers will be advocating from these very same policymakers to make up for the very large (perceived) injustices committed on them by their employers.


One Response to “A Test of the Zero Marginal Product Hypothesis”

  1. jb says:

    Here is a twist the central planners didn’t consider. We are an investment advisory firm. I have an employee currently earning a SALARY well under $50k but whose variable comp (incentive based on book of business) puts her north of $100k. Employer and employee are perfectly content with the current arrangement. Especially for the firm because if the market heads south (north) her compensation heads south (north) so the firm’s bottom line is protected from a severe downturn. But now I’ll be forced to increase her salary massively to avoid her being classified as an hourly worker, or begin having her punch a clock while effectively tracking/ discouraging any work from home, on the weekends. In either case I’d have to cut her variable pay. Nobody wins.

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