Rules regarding overtime pay released last week by the Obama administration have reignited debate over levels of compensation that are fair to workers and businesses.
The rules, which will result in pay increases for millions of workers nationwide, were cheered by labor advocates and denounced by business groups. The Department of Labor estimates 16,000 Maine workers will be affected by the changes.
The fundamental problem that the new overtime rules — and attempts to raise the minimum wage — are trying to solve is that employee compensation is no longer closely linked to productivity. For several decades after World War II, compensation of middle-class workers closely tracked increases in economic productivity. That link broke in 1973.
From 1948 to 1973, economic productivity increased by 96.7 percent, and hourly compensation of nonsupervisory workers rose by 91.3 percent. Between 1973 and 2013, productivity increased by 74 percent but compensation only increased by 9.2 percent, according to analysis by the Economic Policy Institute, a left-leaning think tank.
There are many reasons for this, including the decreased strength of unions, technological developments, the offshoring of work previously done by U.S. workers and a stagnant minimum wage, Thomas Kochan, a professor of management at MIT’s Sloan School of Management, wrote in a column published last year by Fortune.
Because there are many contributing factors, there must be many parts to the solution as well, Kochan says. As possible examples he suggests that businesses tie wages to profits or customer satisfaction, that policymakers adjust minimum wages to the cost of living and that workers be empowered to better negotiate compensation. The bottom line, he wrote, is that workers must share more equally in the economic growth they help power.
This isn’t just a philosophical argument, but an economic one as well. Consumer spending accounts for 70 percent of the nation’s economic activity. If low- to middle-class workers have more money in their pockets, from higher wages or overtime pay, they can spend more on goods and services, spurring needed economic activity.
Stagnant wages also mean that American workers are less able to save money — for retirement, emergencies, education and other expenses. Half of American families have no retirement savings, and the median working-age family had only $5,000 saved for retirement in 2013. This leaves retirees heavily reliant on Social Security.
Nearly 90 percent of parents expect their children to attend — and benefit from — college, but fewer than half are saving money for it. The average college savings were $10,040 in 2015, the lowest level in three years, a national Sallie Mae study found. This is less than the cost of one year at most four-year colleges, so families and students are left to borrow increasing amounts to pay for college.
A recent Associated Press-NORC Center for Public Affairs Research poll found that two-thirds of American families would have difficulty covering the cost of a $1,000 emergency.
The Obama administration has long sought policies to restore the economic power and security of the working class. This week’s overtime rules are part of that work and an attempt to re-establish a link between wages and productivity. In 1975, 62 percent of workers received overtime pay. Today, the figure has dropped to 7 percent, according to the White House, while the average number of hours worked annually by Americans between 1975 and now is nearly unchanged.
The biggest change in the rule, which takes effect Dec. 1, is to raise the salary threshold — from $23,660 to $47,476 per year — below which most salaried workers are guaranteed overtime pay. The last adjustment was in 2004, during the Bush administration, when the threshold jumped from $8,060 to $23,660. The new level will automatically update every three years to prevent future irregular, overdue and large increases.
The new rules will certainly have an impact on businesses and, especially, nonprofit employers. Businesses, workers and policymakers need to seek out innovative solutions, such as those suggested by MIT’s Kochan, so employers and workers can share in prosperity.
