Economists have failed dismally to convince the public of the benefits of trade. Perhaps we should admit that and start from scratch.
Labor Day speeches brought attention to the Bush administration’s proposed changes to rules implementing the Fair Labor Standards Act (FLSA). Claims and counterclaims about these proposals describe wildly differing estimates of their effects on workers.
Regardless of which side is more correct, the controversy highlights two important truths: Labor legislation such as the FLSA has less effect on wages and hours than labor advocates realize. Secondly, it has more positive effects for society as a whole than libertarian economists are willing to admit.
The FLSA is part of late New Deal legislation, passed in 1938, five years after President Franklin Roosevelt was first inaugurated and three years after the National Labor Relations Act (or Wagner Act) that codified union organization and collective bargaining.
Unlike the NLRA, which focuses on union activity, the Fair Labor Standards Act applies to the great majority of hourly wage workers, unionized or not.
This is the legislation that first set a national minimum wage. It also established the 40-hour workweek as the norm. It did not ban longer weeks. Nor did it make working more than 40 hours a week purely voluntary. Employers can legally make workers put in more hours or be fired. But the act did specify that any hours over 40 had to be paid at 1½ times the wage for the first 40 hours.
While most workers are covered by the act, it does exempt certain employers and employees from either the minimum wage or overtime pay requirements. (A good overview of the FLSA and its exemptions is available on the Web.)
The Labor Department now has proposed some changes to the specific rules used in implementing this law. Since there is no change to the underlying law itself, Congress did not initiate these changes. Congress could stop their implementation, however.
Most of the changes deal with who is exempt from the “time-and-a-half” pay requirement. The Labor Department and opponents of the changes generally agree that about 1.3 million workers now exempt from the law would be covered. They disagree on how many people now covered would be exempt after the proposed changes.
The department expects that about 600,000 workers now covered would be exempt. Some opponents claim that this estimate is far too low and that the correct figure might be as high as 8 million. Sharp differences of opinion exist over how the changes would affect public employees — especially police and fire workers.
The controversy bemuses many economists, who think that market forces of supply and demand are the most important in determining wages.
The proposed changes may exempt employers from the legal requirement to pay overtime to certain employees. But if employers do not pony up enough compensation to persuade workers to keep on doing these jobs, the jobs will go unfilled. There may be some short-run adjustments, but the incomes of people newly exempted from “time-and-a-half” status will see their incomes fall little, if at all.
Threatened workers and their unions scoff at this argument as ivory tower theorizing. The public safety unions in particular seem convinced that there will be no changes in new collective bargaining agreements or any increases in base wages to offset the effects of no more overtime pay. Economically literate opponents note that the economists’ argument contains an “in the long run” caveat and assert that the short-run costs to affected workers will be substantial.
As usual, both sides are partially right. Lots of good studies of employee compensation in the real world bear the economists out. Over the decades, the effects of both minimum wage and overtime pay requirements of the FLSA are small for most hourly workers. A large majority would earn about what they earn now if the act were repealed.
Wages largely are determined by market forces — but not entirely. Labor markets are not perfect. Large employers have more bargaining power than individual job candidates. Some, especially in smaller towns or cities, have a substantial degree of power as the only employer of significance in some area. Companies can and do abuse this power.
Moreover, information problems are common in labor markets. A lot of workers don’t really know what their employment alternatives are, and searching for information about other jobs is expensive and time consuming.
All of this goes to say that some workers will see lower incomes if the proposed new rules are adopted. I doubt it will be several million, as some unions assert, but it may be well above the 600,000 estimated by Bush political appointees at the Labor Department.
Some conservatives note that relatively high-income public sector employees — many of them unionized — are the most likely to experience at least short-term losses. Even so, most of the 1.3 million beneficiaries are much lower on the income totem pole.
Congress can act to bar or modify these rule changes. Whether it should or will do so is highly unclear.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.