Archive for June, 2017

Minimum wage and overtime pay regulations

Sunday, June 18th, 2017


The Minimum Wage and Overtime Pay have opposite effects. Minimum Wage laws encourage concentrating work in less people, while Overtime Pay penalises the concentrating of work. For overtime pay laws to help the worker, you have to believe that businesses benefit from concentrating work. This could be due to labor productivity and experience curve effects – overtime laws would then be decreasing labor productivity in order that more of the gains go to the worker instead of the business.

Minimum Wage

Supply and Demand

By mandating that the hourly wage be above $5 dollars, the government affects businesses that are currently paying workers $4 an hour. Within the framework of supply and demand curves, where price and quantity are the only considerations, businesses can either

  1. Pay workers $5 instead, and make less profit
  2. Fire those workers

(2) is a negative effect, while (1) is a zero-sum effect.  (1) is the desired effect, and (2) is the cost of achieving that goal.

Other possibilities

Outside of supply and demand, there are more possibilities. Businesses can find ways to increase wages, by either investing in training or in more automation.

Assuming that businesses were maximising profitability before the change, in the immediate term the profitability of businesses is expected to go down – otherwise the business would have been irrational to not have invested in training or more automation before the regulatory change.

However, I can imagine a scenario in which this leads to a better longer-term outcome. If the low productivity environment is a coordination problem, where everyone wants to invest in productivity but the first to invest is severely punished by poaching and copycats, then you might find that adding a constraint ends up boosting productivity in the longer run. Let’s say a factory wants to train its workers better, but knows that those better workers would then be stolen by competitors – then yes it would be possible for a raise in the minimum wage to cause everyone to invest in education and training at the same time and help the companies get out of that trap. This is the more complex scenario, however, and if you choose to believe this will happen then that burden of proof is on you.

Overtime Pay

Supply and Demand

Minimum wage regulations concern the absolute level of wages. Overtime regulations are about the relative levels of wages for regular and overtime work. Before wages adjust, it acts as a higher price floor for overtime work. Wages will adjust – we expect regular wages to go down and overtime wages to go up, and regular employment to go up while overtime employment to go down.

Overtime pay laws have an effect opposite that of the minimum wage. Whereas the minimum wage encourages you to concentrate labor costs in less people, overtime wages encourage you to spread the labor out amongst more people. Thus

  1. Pay workers overtime and maintain the same level of work concentration
  2. Hire more workers and spread out the work amongst more people

Other possibilities

For the same reasons as above, in the immediate term profitability is expected to go down. Spreading out work decreases productivity – experience curve effects run in the other direction. You are forcing businesses to pay more in order to hold on to labor productivity. A manager that wanted to invest in training one employee to be more productive might now choose to employ two untrained employees instead, as having the trained employee work longer and make more money at a higher rate is now no longer an option. With regard to experience curve effects, (1) is the desired effect, and (2) is the cost of achieving that goal.

Given that overtime pay penalises the concentration of work, I can’t imagine a scenario in which it encourages investment in labor productivity. Training is a fixed cost per person, and its benefits accrue to the company on a per person basis – overtime pay forces each person to have a lower utilisation than before. This means that in every scenario, training has now become a less effective choice than before.