David R. Henderson  

Krugman's Orwellian Language: Less Bargaining Power is More

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The rich heart of Europe... Euroteach...
The other story was about a policy change achieved through executive action: The Obama administration issued new guidelines on overtime pay, which will benefit an estimated 12.5 million workers.

What both stories tell us is that the Obama administration has done much more than most people realize to fight extreme economic inequality. That fight will continue if Hillary Clinton wins the election; it will go into sharp reverse if Mr. Trump wins.

Step back for a minute and ask, what can policy do to limit inequality? The answer is, it can operate on two fronts. It can engage in redistribution, taxing high incomes and aiding families with lower incomes. It can also engage in what is sometimes called "predistribution," strengthening the bargaining power of lower-paid workers and limiting the opportunities for a handful of people to make giant sums. In practice, governments that succeed in limiting inequality generally do both.


This is from Paul Krugman, "Obama's War on Inequality," New York Times, May 20.

It is clear from the context that Krugman is claiming that the new Obama regulation on overtime pay is an example of "strengthening the bargaining power of lower-paid workers."

He's wrong. It does just the opposite.

Probably the best way to help him see the point, if, as I doubt, he wants to see the point, is to consider his situation with his employer, the City University of New York. Krugman is a salaried rather than an hourly worker. So he doesn't have to punch a clock and no one is keeping track of his hours. He can work on his lunch break if he wants, he can work on an airplane, he can work any time and anywhere.

I don't know the specifics of his deal with his employer, but of my above claims I am virtually certain.

Imagine that you are making between $40K and $45K, much less than Krugman's $225K. You are salaried. You don't want or need as much flexibility as Paul Krugman has, but you do want some flex. You want to be able to have an occasional long lunch hour some days and a short lunch hour other days. But this won't always works out to 40 hours a week. Some weeks you will work 38 hours, some 42 hours, some 45 hours, some 34 hours. You ask your employer for that flexibility and your employer answers, "Fine, as long as the work gets done. And, in return, there might be times, not often, but some times, when you need to come in on a Saturday morning."

You think about that. You respond, "OK, as long as I can take a few hours off in a day, when there's a lull, but I guarantee that the work will get done." Your employer and you agree.

Is there anything in this story that sounds implausible?

What just happened?

You exercised your bargaining power.

Now someone who doesn't know you from Adam comes along and says, "Your agreement with your employer means that some weeks you will work 45 hours. In the weeks that you earn 45 hours, the employer must pay you for 47.5 hours. (Overtime rules require that the employee be paid time and a half for any hours over 40 in a week.) You may think that those cancel out so that your average is 40 hours a week. Tough. We don't think the same way. Your deal is illegal. The employer must pay you overtime any week that you work more than 40 hours no matter what happens in the other weeks."

Now the employer has to rethink his earlier agreement. Paying overtime wasn't part of the plan. He can adjust by lowering your base pay so that some weeks you earn less than before and some weeks (the weeks with overtime) you earn more than before. And he must keep track of all these hours, whereas he didn't before. He reluctantly goes along and cuts your base pay.

The arrangement has been altered. You might not like that. You have rent to pay in the 4-bedroom house you share with 3 other single people and you like the certainty of that weekly income. But now the employer, in response to that regulation, has removed that certainty.

Your bargaining power is now less. QED.

Update: Question for extra credit.
Why do you think the Obama administration chose December 1 as the date for implementation?


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COMMENTS (18 to date)
bill writes:

well said

Kevin Erdmann writes:

Even worse, a salary track with an on-call work schedule is a common track for aspirational workers who lack educational credentials. This will only make that aspiration more difficult to express.

Glen Raphael writes:

Later in the article, Krugman writes:

How does Denmark do it? Partly with higher taxes and bigger social programs, but it starts with lower inequality in market incomes, thanks in large part to high minimum wages and a labor movement representing two-thirds of workers.
If you follow the link to "high minimum wages", the first sentence of non-title content is "There is no legally stipulated minimum wage in Denmark."

So I'm sure Krugman will agree that if we want to be more like Denmark we should get rid of state, city and national minimum wages and instead leave it up to workers and employers to negotiate whatever wages they see fit.

Hang on a second...Hillary wants to raise the minimum wage, making us less like Denmark. Perhaps she hates poor workers and loves inequality?

ThaomasH writes:

While I agree that it would be better to substitute other forms of redistribution for the minimum wage, it is still true that restricting employees's ability to bargain for a lower wage can, depending on the elasticity of demand for labor, still increase aggregate wages paid.

David R. Henderson writes:

@ThaomosH,
While I agree that it would be better to substitute other forms of redistribution for the minimum wage, it is still true that restricting employees's ability to bargain for a lower wage can, depending on the elasticity of demand for labor, still increase aggregate wages paid.
That has nothing to do with the discussion at hand. The discussion is about overtime rules, not minimum wages. But since you raise it, increasing the minimum wage does reduce an individual worker’s bargaining power. With a government-imposed constraint on wages, other parts of the pay package will compensate, and the worker has less say.

Kevin Erdmann writes:

ThaomasH:
Don Boudreaux had a great point the other day, building on David's point. To support these rules, you have to believe that employers have overwhelming power to determine hours (or wages, in the case of minimum wage), but no power to make demands in any other aspect of the job. This is unlikely, and in the case of someone supporting both minimum wage and overtime legislation, logically inconsistent, since it implies that employers have overwhelming power in more than one aspect.

Also, regarding elasticity, it seems this is the crux of the matter. And, it seems the problem is that some employers have inelastic demand for labor in the short term, which can be measured directly (eg. Card & Krueger) but that in the long term, across firms, demand is very elastic (eg. Meer & West) but can only be measured indirectly. The long term across firms is the more important measure, but more difficult to measure.

David S writes:

Re inequality, I find it interesting that states with stronger conservative influences have better income equality than liberal states:

https://en.wikipedia.org/wiki/List_of_U.S._states_by_Gini_coefficient

Perhaps liberals should focus more on what actually appears to be working...

Ken P writes:
Now the employer has to rethink his earlier agreement. Paying overtime wasn't part of the plan. He can adjust by lowering your base pay so that some weeks you earn less than before and some weeks (the weeks with overtime) you earn more than before. And he must keep track of all these hours, whereas he didn't before. He reluctantly goes along and cuts your base pay.

I understand that you are making your point from the bargaining standpoint. But in my experience, there often is little or no overtime involved. Moving from hourly to salaried is often a small perk you get along with the raise they give you for the promotion. For the worker's end, there is an offer to take on more responsibility and/or continue to operate at the higher level they demonstrated prior to earning the promotion.

For employees who became salaried under such circumstances and now have to go back to hourly, there is no pay change to ponder just a switch to hourly pay with a mandate that time is tracked.

This policy is essentially a demotion for them. It's back to punching the timeclock, taking short lunch breaks and generally feeling like you have a babysitter. You lose a sense of autonomy and professionalism.

One of my employees is hourly and it adds work for me to have to correct missed time punches, etc. Plus I feel bad that he has to take exact half hour lunch breaks and as a result if he goes out to lunch can only eat at McDonald's. This also segregates hourly employees from salaried for going out to lunch together.

Chris Wegener writes:

Dear David--

I wish I lived in your universe.

In the one in which I have lived as a salaried employee I have never been in a situation where there was an occasional request for a morning of work on Saturday.

Until I was able to develop the skills to work in technology full time the least number of hours I was required to work was forty five hours. Normal was the expectation that employees were expected to work between sixy to eighty hours per week.

Further if you were late in the morning or took the occasional long lunch or left early there was certain to be a discussion with your supervisor about the importance of being punctual. Not to mention the expectation that you would be available evenings and Sundays to respond to pages or when it appeared email.

A writes:

@Chris Wegener, you were lucky enough to be at a socioeconomic level where you could sacrifice hours for comfort. Not everyone will be where you were! Some people look at all their available options, and bid for more hours because that is the best option.

hanmeng writes:

Is Obama working from the wrong model, or does this policy actually work to someone's benefit?

Alnoaimi writes:

@David R. Henderson
While I agree with you that increasing the minimum wage would give the workers less power to bargain and the workers would have less to say. Setting restrictions on workers bargaining power could also increase the wages that are paid to the workers.

Miguel Madeira writes:

"I find it interesting that states with stronger conservative influences have better income equality than liberal states"

Perhaps the cause-effect is the opposite: redistributive policies having naturally more appeal in regions with more inequality?

Sol writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

ThaomasH writes:

David R. Henderson writes:
@ThaomosH,

I think there is a common issue in both overtime pay and minimum wages. Both do reduce the bargaining power of each individual subject to it. And almost always reducing an individual's bargaining power is detrimental to him individually; if I do not wish to work for less than 15/hr I am not harmed by a minimum wage of 15/hr and if I do I am.

But surely you must see that there is a potential fallacy of composition involved. If I restrict everyone's ability to bargain for wages less than 15/hr, some people's wages will rise and others' will fall to zero. So in order to judge whether a restriction on bargaining power is helpful to the workers affected we need to look at the aggregate effects. It is not enough to point out that some workers may be harmed. Of course that some people will benefit is not the end of the story either. We need to look at the whole system. By stopping the analysis at the point of identifying a loss of (individual) bargaining power, your analysis seemed incomplete.

Brad D writes:

Obama probably chose Dec 1 because of the ramp up in seasonal workers due to the Christmas holiday.

Terry Ott writes:

@Chris Wegener, In my experience as a business owner and previously an management person in the HR field, your claim of 60-80 hours a week being expected, plus interruptions of "off-work" time is simply terrible HR policy. Moreover, being called out for punctuality, etc., in an environment such as you describe is egregious.

Two questions come immediately to mind: (1) Didn't employees burn out in short order such that their performance suffered greatly? (2) How many people chose to stay working at such a company unless there was a outrageously generous pay scale, and for that matter -- why did you?

Krishnan writes:

Why December 1? Apparently, if Congress wants to change any such rule/regulations, it has 60 days (up or down vote) - and by setting it to Dec 1, it is highly unlikely the Congress will do anything till the new one takes over in January (The Wall Street Journal had this reason, from what I recall)

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