Economic Impact Projections

As of Dec. 1, 2016, the salary threshold for exemption from the overtime requirements of the Fair Labor Standards Act has been increased from $455 per week ($23,660 annually, roughly $11.38 hourly) to $913 per week ($47,476 annually, roughly $22.83 hourly).

California, on the other hand, bases its overtime income limits on the minimum wage. By 2022, when the minimum wage is $15 an hour, the overtime law will be set at $62,400 (up from its current value of $43,680 in 2017 for California, an increase of about $2,000 from the 2016 value). This means that large increases in the number of employees who can earn overtime can have a large impact in Kern County. The fact that the overtime pay will be coupled with annual minimum wage increases until 2022 means that businesses must continually adjust their rules annually or adjust based on the 2022 expectations immediately.

Before exploring the data behind this change, we can examine some of the changes that could be made by businesses to cope with the higher labor costs that might be imposed. The first is that businesses may be more keen in employing workers as part time rather than full time. Not only do part-time workers not have the same required nonwage benefits (health insurance contributions, retirement contributions, paid time off, etc.), there is more leeway for the firms to increase the hours per week of these employees to 40. In other words, employers now have more ability to have their workers go over without fear of paying extra overtime monies.

A second mechanism that may kick in is the increased technological innovation and adoption in a market. As anyone in human resources or a legal department can tell you, the cost of hiring a worker is not only the wage and nonwage compensation that they are paid, but the cost of violating a labor act that can subject the firm to penalties. By technological adoption, however, these costs are altered as there can be no overtime violation.

A third mechanism is that workers may be paid lower hourly wages but compensated by other nonwage benefits (such as health insurance, retirement benefits, vacation and sick pay, etc.) to reduce the burden of having to pay higher hourly wages and overtime wages. Similarly, firms can “compensate” by passing on these higher labor costs to consumers, largely through higher prices in labor-intensive industries.

This is not to say that there are no substantial benefits from the new overtime law. It prevents workers from being exploited by unscrupulous firms that pressure them to work more than a 40-hour workweek. There is a sizable strand of research that suggests that “efficiency wages,” where workers are paid more than market wages, increase effort and productivity, as workers would lose more from losing their job.

In this way, the overtime law may increase productivity as workers want to showcase why they should earn the extra overtime hours. A third benefit is that it fights the tremendous poverty facing low-income, low hourly wage workers and can help alleviate the tremendous issues that these families face.

However, in this article, we focus mainly on the costs to businesses and set aside (momentarily) the benefits to working families and society that these changes can make. Though undoubtedly important, they are not the main thrust of the article (but should not be ignored in any calculation of the social impacts of this legislation).

We now move to looking at the proposed overtime impacts in Kern County, utilizing wage data from a variety of industries and looking at the total aggregate business cost, as well as the total aggregate increase in income.

According to the Employment Development Department from the State of California, in 2016 the mean annual wage in Kern County was $46,996, an average hourly wage of $22.60. If incomes are distributed “normally” in Kern County (more on this in just a second), the average is a good representation of the median (or middle) individual in Kern County. This means that with the new overtime laws, by 2022, slightly over 80 percent of households in Kern County will be affected by the new overtime laws, a substantial fraction of individuals will be affected. In fact, nearly 185,000 households in Kern County will be affected.

What the Employment Development Department wage statistics tells us, however, is that the average is not a good representation of the median. The median (or 50th percentile wage) for all workers in Kern County in 2016 was $16.68 (an annual wage of $34,694). This highlights that a substantially higher fraction of workers in Kern County (close to 62 percent of workers and households, in fact) were earning below the old income thresholds for overtime. By 2022, with minimal wage inflation, nearly 80 percent of workers will earn an income below the “exemption” threshold. Out of the close to 300,000 employees in Kern County, this would be nearly 240,000 workers impacted by the new overtime law — an incredibly high number.

However, even though this number is high, we should analyze the number of new workers being included in the new overtime laws. From the minimum wage increase of $10 to $15, this means that nearly 54,000 new workers will be covered by the overtime laws.

Looking deeper, we can look at industry level impacts, and estimate the number of employees impacted by the new overtime laws.

The table highlights the potential massive increase in wages that may need to be paid for overtime work. For the rest of this article, we will assume that during any year, 25 percent of workers who are hourly will earn overtime pay.

For the food and restaurant industry, labor costs account for, on average, about 30 percent of total revenues. This means that we could see, at the very least, a 15 percent increase in restaurant prices, a not negligible pass through to consumers, by 2022. This means that an annual restaurant budget of $5,000 would increase by nearly $750 annually; in an area of cash being constrained for many families, this represents a sizable increase in annual family expenditures.

Farms are expected to be dramatically impacted by rising labor costs; as much as 40 percent of total costs are labor related for labor-intensive crops, according to the U.S. Department of Agriculture. Since most agricultural laborers were covered under the older overtime laws, only a few new ones will be impacted. However, this can still have a substantial impact, as nearly all farmworkers will be impacted by the new minimum wage legislation. In fact, the rise to $10.50, coupled with the new overtime laws, means that farm costs in 2017 will likely rise by 5 percent; by 2022, farm costs will have likely risen by nearly 20 percent. This will have a substantial impact on the industry and on food prices. In fact, it is not unlikely that food prices this year will increase by 5 percent, meaning that a $10,000 grocery bill will be increased by $500 (by 2022, this may have increased by $2,000). Similarly, this will impact the restaurant industry as another cost that they face will increase.

Again, the new overtime law will put strains on the budgets of lower income families that do not have much disposable incomes. It is likely that, through a variety of mechanisms, food costs will increase by as much as $1,250. For a family earning $25,000, this represents about 5 percent of their annual family budget, a nontrivial amount.

What does this mean for employers? Employers are going to be threatened by rising costs in a variety of arenas. In fact, by 2022, it may be that average business costs will have risen by nearly 10 percent in Kern County, a nontrivial amount. Businesses will need to ensure that they are following proper protocol for reporting time and not skirting the laws.

Perhaps there are efficiency gains that employers can accomplish, as the “leaning out” of business in Kern County following a long period of low oil prices continues.

— Richard Gearhart is an assistant professor of economics at California State University, Bakersfield, and managing editor of the Kern Economic Journal, a publication that tracks and analyzes local economic trends and data.

(1) comment


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