Let's Fix This Country

Minimum Wage Blocked, Obama Tries Overtime End Run

He intends to greatly expand universe of workers entitled to overtime pay

While arguments for and against an increase in the minimum wage rage back and forth — a debate “dumb as rocks”, Bloomberg/BusinessWeek calls it — President Obama's offense turned to a different page in his playbook, directing the Labor Department to revise rules on overtime pay. The move would tighten who in the workforce can be called supervisory and therefore ineligible for overtime pay as well obstruct businesses who falsely classify workers to avoid paying them for added hours of work.

As for the minimum wage. the Republican rebuff of Obama’s call to “Give America a raise!”, by their refusing to consider an increase, hands Democrats a popular cause (73% percent of Americans, including 53% of registered Republicans, favored the wage hike in a January Pew Research poll) with which to counter the GOP’s assault on Obamacare in the coming congressional elections. The rude shock of the Florida special election in which a Republican former lobbyist edged past a well-known and well-financed ex-candidate for governor, largely due to a deluge of outside money running ads against the healthcare law, tells Democrats that accusing Republicans of their mean-spirited denial of a minimum wage increase may not be enough. Obama's overtime reset adds to Democrats claim that they are looking out for the little guy. It is expected to benefit some 5 million workers.

the job loss kerfuffle In February a report on the minimum wage by the Congressional Budget Office had already handed to Republicans a half-truth that sprung a full-court press in the media. They made straight for one statistic in the report and benched all others — the estimate by the CBO that the increase from $7.25 to $10.10 could result in a loss of 500,000 jobs.

“This report confirms what we’ve long known”, said House Speaker John Boehner. A chiding Wall Street Journal editorial said, "Now comes news that a higher minimum wage is splendid even if it throws half a million poor people out of work”.

One would never know from such trumpeting of that number by conservative politicians and commentators that the CBO also concluded that almost a million people would be lifted out of poverty, 16 million low wage workers would benefit from an increase, another 8 million currently paid above the minimum would probably see increases because of stepped wage structures in companies, and the aggregate of $31 billion added to paychecks — every dime of which would be spent by low-wage workers — would give a boost to the sluggish economy.

But there was more. The report went on to explain that CBO actually believed job losses would range from zero to 1 million, and the eventuality of any job losses at all was given only a 2/3rds chance of occurring. The CBO had simply settled on the midpoint of 500,000. A New York Times editorial called it “essentially the budget office’s way of saying it doesn’t really know what would happen”. The CBO hadn’t done its own research; they had compiled studies by others and had not given weight to the more recent research that has caused economists to come around to the view that job losses are minimal when wages are raised a reasonable amount.

The more recent studies expanded on the idea of two researchers at the Univ. of California Berkeley, David Card and Alan Krueger, to compare in their 1992 study employment data in adjacent counties in Pennsylvania and New Jersey before and after the latter state raised the minimum wage and the former did not. They found “no indication that the rise in the minimum wage reduced employment”. That study is heavily cited as a turning point in research on the subject. Since then, others who have replicated the approach around the country have reached the same conclusion.

A holdout is David Neumark of the University of California, Irvine. He says a higher minimum wage costs some low-skilled workers their jobs while helping those who keep them. Weighed against him, in a technique adopted from medicine, is the meta-study, where many small clinical trials are combined to produce consensus estimates. As “one of the most studied topics in all of economics”, the minimum wage’s impact on jobs is well suited to this form of analysis. The Center for Economic and Policy Research, which by our count crunched hundreds of studies, concluded “that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers”. This chart — albeit from a site with an evident mission called raisetheminimumwage.com — shows a composite of 64 studies that coalesce around “zero impact on jobs”.

Accordingly, some 600 economists, a group including seven Nobel prize-winning economists and four former presidents of the American Economic Associations, signed a letter to the president and congressional leaders urging passage of the $10.10 floor, calling it “a much-needed boost to the earnings of low-wage workers”.

Worth mentioning is that America’s minimum wage is 27% of the U.S. average pay, a lower ratio than that of any other member of the Organization for Economic Cooperation and Development except Mexico.

off the clock?

“Overtime’s a pretty simple idea”, said Obama in announcing his intentions. “If you have to work more, you should get paid more”. By changing the rules he means to inhibit what is thought to be the widespread practice by employers of avoiding paying for overtime by salaried workers using the ruse of classifying them as executive, administrative or professional personnel exempt from overtime pay as prescribed by law. As the president pointed out, for those low on the pay scale and depending on the degree of abuse, “this rule actually makes it possible for salaried workers to be paid less than the minimum wage” when their salary is divided by total hours .

The U.S. Chamber of Commerce (a pro-business advocacy group not connected to the government) and conservative politicians in Congress reacted angrily to the president again acting on his own, changing policy by executive order, although he has issued less executive orders than most as this table shows. “There’s no such thing as a free lunch,” said Daniel Mitchell, a senior fellow with the Cato Institute, quoted by The New York Times, an odd choice of cliché inasmuch as that seems to be what businesses enjoy by not picking up the tab for extra time worked.

Obama is empowered to set overtime rules by the 1938 Fair Labor Standards Act, just as George W. Bush did when he revised the rules in 2004. Bush favored business by setting the bar low: any salaried employee making over $455 a week could not claim pay for overtime work. And Bush gave business owners extraordinary latitude to classify work. A supermarket employee who normally unpacked shipments but was made to spend 5% of hours on tallying inventory, say, could be classified entirely as “administrative” and denied overtime altogether.

President Obama is expected to set the cutoff much higher than $455 (which, had it been linked to inflation, would be $575 today), and will call for a much higher percentage of administrative work for an employee to be exempt from overtime pay.

missing the target?

An argument against the minimum wage’s existence is that it benefits people indiscriminately. Martin Feldstein, a Harvard professor and once economic adviser to Reagan, says it is “a crude policy that fails to distinguish between a young person who lives at home and a working mother who is the sole support of her family”. Douglas Holtz-Eakin, a former CBO chief who now heads his own conservative advocacy group, says 80% of minimum wage earners are not truly poor according to the Census Bureau. Many have better paid spouses; some 46% are teens or young adults; more than 1/3 of all minimum wage earners live with parents. So what is the minimum wage accomplishing? But researchers at Univ. of California Berkeley, their study funded by labor organizers, learned that only 23% of fast food workers are under the age of 19. But wait. Wasn't there a study from summer 2012 that said 9 of 10 earning the minimum wage are over 20; more than a 3rd are married; 25% have children? It's a subject that seems to prove the adage that statistics can be made to support whatever case one is making.

workers getting less

There may be strong political motivation in an election year to advance programs that appeal to lower income groups, but their plight is real. Workers got only 42.6% of gross domestic income in 2012, the lowest on record. Yet conservatives are against both of these programs to raise wages.

The view from the right is that, if there were no costly overtime pay rule, or if there were no minimum wage, if individuals could hire out at less than $7.25 an hour, more could find work, enter the labor force and learn new skills. That solution — essentially an expansion of the Earned Income Tax Credit — is covered in this article on this page.

subsidizing big business

Feldstein says the minimum wage is “in fact a hidden tax increase” on businesses that is passed on to consumers as higher prices. It is an oddly myopic view because it fails to see that below poverty-level wages result in the same. They force people onto the public assistance rolls with the result that taxpayers are subsidizing businesses that pay the minimum wage or close. A study conducted for the Center for American Progress found that raising the minimum wage to $10.10 per hour would save taxpayers $4.6 billion in spending on food stamps. Researchers at Univ. of California at Berkeley calculated fast food workers alone drew upon nearly $7 billion of public assistance from taxpayers such as food stamps, public housing and Medicaid from 2007 to 2011. Given its size, McDonalds share alone is $1.2 billion a year. Taxpayers are effectively paying 20% of the company’s profits.

McDonalds came in for ridicule for a tutorial on its website titled “Practical Money Skills” that educates its employees how to budget and save money. First step, get a second job. The chain admitted that a family can’t live on its wages.

ah, but inflation!

As for the higher prices that Feldstein and most economists assume, hysteria can overtake reason as in a Wall Street Journal op-ed that asked, “Isn’t it obvious that, with a higher wage, McDonald’s $1 menu, for example, would cost $3, few would buy it, Mickey D would have less revenue”, etc. The writer believes a 40% wage increase to $10.10, and with payroll only part of fast food operating costs, would lead to prices 300% higher. (Doesn’t the Journal edit these op-ed pieces?)

Even in major retail chains with a significant labor component, wage increases can be absorbed without major price hikes just as in the past. Testimony to that is that the restaurant and retail chains have grown bigger than ever. This group of economists calculates that McDonalds would only need to raise the price of a Big Mac by five cents — a 1% increase — if the minimum wage were raised to $10.50 an hour. A study from Univ. of California Berkeley's Center for Labor Research and Education calculated that if Wal-Mart raised its average wage from $8.81 to $12.00 an hour, and passed on the cost to consumers, it would cost their average shopper an extra 46 cents per visit, amounting to $12.49 a year.

Opponents set up a straw man when they argue that neither the minimum wage nor overtime pay rules solve the problems of social mobility and income disparity. That’s not what proponents claim because neither are social programs. As with the original Fair Labor Standards Act, the intent is the protection of workers from exploitation, that an employer should not be allowed to usurp a worker’s time or benefit from a worker’s services while paying wages that keep an underclass in penury. If a business cannot survive other than by paying poverty-level wages, capitalism’s own precepts say that it should fail.

The night before Roosevelt signed the Fair Labor Standards Act in 1938, which required a 25¢ an hour minimum wage, he said in a radio fireside chat, “Do not let any calamity-howling executive with an income of $1,000 a day…tell you…that a wage of $11 a week is going to have a disastrous effect on all American industry”. Sounds kind of like today, doesn’t it?

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