Overtime Rules Based on Bogus Economic Theory

Jeffrey A. Tucker

This very day, millions of business managers are pulling their hair out, dealing with a genuine and traumatizing October Surprise that has nothing to do with the election. The Department of Labor, on its own and without a vote from Congress, has made a seemingly small administrative change that is profoundly and disastrously affecting the lives of probably tens of millions of people (if you include everyone directly and indirectly affected).

Its final implementation happens December 1, which means the clock is ticking.

People who six months ago imagined a career with a particular company now find themselves ghosted in light of financial realities.Anyone making less than $48,000 a year in salary is directly affected, and for many businesses this means thousands of people. This seemingly small change is upending many things about people’s career paths, sense of professional identity, and life plans.

And so many others, who are seeking entry-level positions to show how awesome they are, will be denied the opportunity to enter professional life at all, and their absence will not be counted because the costs are unseen. People who six months ago imagined a career with a particular company now find themselves ghosted in light of financial realities.

The regulatory change sounds merely technical at first. The government requires overtime pay for anyone working more than 40 hours per week (“time and a half”), but it only pertains to employees making less than $23.6K a year. We’ve come to think of this rule as applying only to entry-level wage employees.

No, You Can’t

I can recall being 18 years old and begging for more time but being denied by my boss due to this rule – an early experience in dealing with the effects of government regulation. It’s a strange situation: I wanted to work more and my employer wanted me to work more, but government rules made it too costly, so we both lost out. Such rules prevent mutually beneficial exchanges.

If you force payment, it means forgoing other things.Still, you were safe once you got on salary and made more than $23.6K. Only then are you free to work as much as you want.

But now the Department of Labor, with the stroke of a pen, has raised this level to $48K, meaning that some 4.2 million people are immediately and directly affected. If they work more than 40 hours per week, the regulations now require that employers pay them more for extra hours. That means, at minimum, massive new record-keeping requirements for both individuals and businesses. It turns out that businesses do not have some box stuffed with cash somewhere in a closet that they can raid to toss more money to existing employees. If you force payment, it means forgoing other things.

Bureaucrats with lifetime jobs know nothing  about work in the private sector.The new rule could mean that millions of people will be reclassified to a lower-status job position: from salaried to per-hour wage. That’s not what anyone wants to happen.

Of course, the Department of Labor – because bureaucrats with lifetime jobs know nothing  about work in the private sector – thinks that this is going to create new opportunities for the good life, because passing laws does this for society.  

Actually, the rule is hugely disruptive of people’s actual plans and their capacity to make their own deals with their employers. People who desire to work more will be denied the chance, effectively forbidden by their own bosses from providing more value.

It’s true that probably millions of others making between $35-40K will be bumped up to $48K, a raise forced by administrative edict. This is so they can escape the overtime rules, but it comes at a cost.  

They will be required to put in more value to the company in order to earn this salary increase, which means more work and less leisure time on their part – exactly the opposite of the stated purpose of the new rule.

Entry-level positions will be foregone in favor of regulatory compliance.These raises also come at the expense of job creation. Entry-level positions will be foregone in favor of regulatory compliance, which is to say that this small change is a job destroyer of the first order.  

Bad Theory

There are many terrible features of this change. The old law was becoming mercifully less and less relevant to American workers, one of the few good trends in business today. It was always an overly scripted, planned, and coercive way of granting “labor rights” by administrative edict, with all the secondary consequences that kind of bureaucratic rationalism inevitably entails. The Obama administration – with its unfailing instinct for making more messes within sectors that were repairing themselves gradually – has seen fit to blot out of the few good trends in labor markets today.

But consider too just how strange the government’s fixation on “labor hours” is. The idea is that the number of hours you work is the only real determination of the value you bring to your job, the only and definitive way to measure productivity. It’s like they are taking seriously Woody Allen’s dictum that “eighty percent of success is just showing up.” Clock in, clock out. You work more (or just show up more), you thereby produce more value; it’s the assumption that productivity is machine-like, and that value is somehow inherent in labor.

 The Labor Theory of Value 

Students of history will recognize this whole idea as the labor theory of value. If labor is the source of value, it is surely exploitation for the capitalist to gain so much in profit from the sale of goods. Government still adheres to it. Its outlines were mapped out by the classical economists, possibly even dating back to St. Thomas Aquinas. The classic formulation comes from David Ricardo, as a mistaken derivation of the relationship between cause and effect: “The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production..."

This minor error, intuitively plausible, persisted for centuries. It took Karl Marx to add the reductio ad absurdum: if labor is the source of value, it is surely exploitation for the capitalist to gain so much in profit from the sale of goods. Everything that doesn’t return to the worker constitutes ill-gotten gains and hence exploitation of the working man.

Now, just a moment’s reflection makes you realize that this supposed relationship between work and value is not direct. You can’t just make anything, do anything, sit in a chair, show up on time and vanish at the appointed hour, make whatever, and have the results be thereby valued in the marketplace. 

The Marxian mania over the labor theory of value caused a generation of economists in the late 19th century to rethink the whole issue and discover the actual source of value. Value emanates from the human mind itself. It is the consumers who act on their values in the marketplace for final goods and services that signal producers about their own decisions. (Their theory in time came to be called the Subjective Theory of Value.)

And all capitalists know this. Everything they produce, every penny they spend on workers or research or marketing, is subject to a final test in the marketplace. Consumers can make a rock valuable or worthless, a song go gold or die immediately, a smartphone all the rage or sit on the shelf, a strip mall become a profit center or be boarded up due to lack of interest. There is nothing that more labor can add to determine whether something is or isn’t a success in the marketplace.

Work as a Proxy

It’s true that sizable portions of today’s contracting workforce charge “by the hour” for its work. By doing so, what you have is the estimation of the passage of time in value terms, given the existence of opportunity costs for the use of that time. But charging by the hour is only a convenient proxy for productivity in general; it is not claiming literally that the passage of time on the clock somehow causes wealth to be produced. And every contractor knows this: if your results are not good, the contract will be discontinued.  

The Department of Labor wildly exaggerates the role of labor hours in discerning, determining, and measuring economic value.But in the hands of bureaucrats, the allegorical proxy becomes the real thing. With its mechanical understanding of the process of wealth generation, the Department of Labor wildly exaggerates the role of labor hours in discerning, determining, and measuring economic value. It cares nothing for smarter work, more efficient work, the differences in talent between workers, the aspect of learning, the role of entrepreneurship in speculating about the value of future final output, or anything else. Instead, they use a model derived from mechanics to govern human action, which is anything but mechanical.

The subjective theory of economic value was a revolutionary insight precisely because it blew up the old assumptions concerning the causative relationship between work and reward. In theory, a worker who has one billion-dollar insight that took 5 seconds to discern is worth vastly more than a worker who spent ten thousand hours making mud pies. And what does this imply about the capacity of outside agents in government to manage economic relationships? It means it can’t be done. We have to leave to market forces to work out what is best for everyone in the ongoing process of experimentation, marketing, innovation, and learning.

Bad Theory Comes Home

But tell that to the arrogant public servants ensconced in marble palaces in the Beltway. Armed with their dated and formalistic models, they imagine that they can merely change a rule and thereby cause justice to be newly born in the world. They have been trying for 100 years, limiting work, channeling work, managing work, slicing and dicing work.

The greatest and most intense cost will be felt by the young and ambitious among entry-level employees. There is far more complexity in labor markets than these rules would indicate. This is especially true today, when people work from everywhere, whenever, however, under an ever-greater variety of institutional arrangements. Every intervention designed to manipulate outcomes will produce unexpected costs that benefit neither workers nor capitalists. At best the attempt creates headaches. At worst, it ruins lives.

What will be the worst result of this rule? It will reduce productivity, demoralize many employees, and create vast and useless paperwork.

I continue to believe that the greatest and most intense cost will be felt by the young and ambitious among entry-level employees. This person might be hired at $32K but desire to put in an extra 10, 20, or 30 hours will be blocked by supervisors. Excellence is punished. Ambition is blocked. Dreams are crushed. And all from one change in the regulations.

In the real world, as versus the artificial models tossed around the halls of the regulatory bureaucracies, bad theory leads to a worsening of the quality of life. And all this happens at the worst possible time for both business and labor. Yes, markets will adapt. They always do. But never think that it doesn’t come at a high cost.  

 

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