US government to raise overtime pay threshold

The US Department of Labor will today finalize a new rule making over four million Americans eligible for overtime pay.

Under the new rule, full-time salaried employees earning under $47,476 a year will be entitled to be paid at a time-and-a-half rate when they work more than 40 hours a week, with effect from December this year. Currently, the salary threshold is set at just $23,660.

The overtime rule was last updated 12 years ago, and has only been revised three times in the last 40 years. According to labor secretary Tom Perez, if the threshold had kept up with inflation, it would currently be set at $57,000.

The Obama administration estimates that the new rule will increase the proportion of salaried employees eligible for overtime from 7% to 35%, equating to 4.2 million additional workers, and will be worth $12 billion in extra pay over the next decade.

In a blog post, President Obama wrote: “This is a step in the right direction to strengthen and secure the middle class by raising Americans’ wages. When workers have more income, they spend it—often at businesses in their local community—and that helps grow the economy for everyone.”

Ronald Oaxaca has written for IZA World of Labor about the effect of overtime regulations on employment. He writes that “regulation of overtime raises employment costs, setting in motion economic forces that can limit, neutralize, or even reduce employment. And increasing the coverage of overtime pay regulations has little effect on the share of workers who work overtime or on weekly overtime hours per worker.”

Similarly, in his article for us on labor costs and demand for labor, Daniel Hamermesh writes that higher labor costs such as overtime pay “make workers better off, but they can reduce companies’ profits, the number of jobs, and the hours each person works … Policies that increase labor costs can substantially affect both employment and hours, in individual companies as well as the overall economy.”

Related articles:
The effect of overtime regulations on employment by Ronald L. Oaxaca
Do labor costs affect companies’ demand for labor? by Daniel S. Hamermesh