The fight over President Obama's new overtime rule, explained

Overtime pay — bonus wages for hours worked above the 40-hours-per-week standard — used to be a mainstay of middle-class life, with about 60 percent of the workforce meeting the federal regulatory standard that required overtime hours to be paid at 1.5 times the normal rate of pay. But over time, inflation and indifference greatly eroded the legal standard’s bite, with a 2004 rule saying only those earning less than $23,660 — about 7 percent of the population — qualified for overtime.

That’s changing this year as part of a new rule announced this week by the Obama administration that, effective December 1, will double the overtime-pay salary threshold and set it to automatically increase every three years. That will mean higher pay for many in the short run, though business groups warn it also means reduced labor force flexibility and possible cutbacks on hours.

It also reflects the latest step in an ongoing change of thinking inside the Democratic Party, which has grown increasingly friendly toward direct regulatory interventions in the labor market.

The Fair Labor Standards Act contains a range of provisions relating to minimum wages and overtime pay. The specific rule the Obama administration is tweaking relates to require overtime pay for salaried workers.

Over the years, salaried workers have been exempt from overtime pay requirements if they are classified by their employer as professionals, managers, or decision-makers. But in order to prevent abuse of that rule, there is also a minimum salary requirement. If you are paid less than a specific cutoff amount, then you are eligible for overtime pay.

By doubling the salary threshold, the new rule ensures that the bottom 40 percent of salaried workers will qualify for overtime — a boon to many in the food service industry and elsewhere at the lower ends of the labor market.

The Labor Department says about 4.2 million workers will gain overtime benefits as a result of the rule, though the populist Economic Policy Institute, which has argued strongly in favor of the rule, says this is a major undercount.

To the extent that the rule works as designed, many people who work more than 40 hours a week will start seeing larger paychecks.

Critics like House Speaker Paul Ryan say that mandating overtime for a wider swath of workers will likely backfire, leading to reduced hours and job opportunities:

This regulation hurts the very people it alleges to help. Who is hurt most? Students, non-profit employees, and people starting a new career. By mandating overtime pay at a much higher salary threshold, many small businesses and non-profits will simply be unable to afford skilled workers and be forced to eliminate salaries positions, complete with benefits, altogether. For the sake of his own political legacy, President Obama is rushing through regulations — like the overtime rule — that will cause people to lose their livelihoods. We are committed to fighting this rule and the many others that would be an absolute disaster for our economy.

The basic argument, in economic terms, is similar to debates over minimum wage rules — if you increase the price of employing labor, you will reduce the quantity of labor that gets employed.

Even if you accept that principle as generally correct, you might think the time is currently right for a wage boost. Corporate profits as a share of the total economy are at an unusually high level, and inflation has been generally slower than the Federal Reserve’s 2 percent target rate, so the economy as a whole seems to have room to afford higher pay without any sharp short-term trade-offs.

But in terms of both inflation and profits, the labor market appears to be headed in a normalizing direction already, so it’s not clear how significant these short-term considerations will be by the time the rule’s impact is felt.

The larger story here is that while the Democratic Party of the 1990s was by no means composed of free market fundamentalists, its leaders were pretty skeptical of this specific kind of regulatory intervention.

They believed in regulations to protect the environment and public health, and in government taxes and spending to redistribute income and provide useful services.

But Bill Clinton’s administration largely did not believe the government could useful impact workers’ overall share of national income or the distribution of pre-tax wages and incomes between workers. That was a contrast to New Deal–era Democrats, who were quite enthusiastic about government wage setting, and was a key aspect of Clinton’s generally “pro-business” orientation relative to traditional American liberalism.

The overtime rule, like Democrats’ increasingly ambitious minimum wage demands, is part of a counter-trend that is coming to believe average people simply will not share in the benefits of economic prosperity unless either government regulators or strong labor unions force economic decision-makers to make them do so.

Average hourly compensation has grown much more slowly than overall labor productivity over the past 40 years, and mainstream Democrats are increasingly convinced by longstanding populist arguments that the government can and should do something about it.