Last week as I listened to the discussion unfold around the new federal overtime rules I was struck by the widespread misunderstanding of just how increasing labor costs impact the workplace. But before we get to that, a couple of quick notes.
If you are responsible for workplace compensation policies and procedures please attend a seminar on these recent federal changes to who must receive overtime, and when. You’ll also need to know about updating job descriptions and making sure that employees follow the new rules, especially outside their scheduled work time. The penalties for violating these new regulations are severe, so don’t delay. The Portland Regional Chamber of Commerce is hosting a seminar on Wednesday June 8th from 7:30 to 9 am at Pierce Atwood – lawyers from the firm will help you get up to speed. Click here for more details and registration information.
Now back to how workplace labor increases actually impact us. It’s not like Robin Hood.
When government regulations increase the cost of labor, like these new overtime rules or a higher minimum wage, what does the employer do in response? There are only a few options.
If possible, increase prices enough to pay for the wage increases. That money comes from consumers. Of course many employers can’t raise their prices (think about non-profit organizations for example) or their competition makes a price increase impossible.
If prices can’t be increased another approach is fewer hours of operation, which will save the money needed to pay the higher wages. That’s just rearranging deck chairs – more dollars per hour but fewer hours doesn’t help workers at all. And shrinking a business isn’t a formula for long-term success.
A third option is automation. Have you seen the interactive touch pads at some chain restaurants where the kids can play games and you can order desert without talking to the waiter? That’s another way to cut costs to pay for higher wages. Of course automation leads to fewer hours, or less workers, or both. Once again the wage increase is being paid by other workers.
Finally there’s the option to lay workers off. Where prices can’t go up, hours can’t go down and automation isn’t viable the only remaining option may be to eliminate the jobs of the least productive workers and shift their duties onto more productive staff. Yet again the wage increase is actually being paid by the folks losing their jobs.
I can hear readers saying ‘hey, what about reducing profits? Make the owners pay for the increase!” Some will, if they are fortunate enough to have the ability to do it, and bless them for that. But so many employers fight every week to make payroll and keep the customers coming. Where profits are slim or none there’s nothing to draw on to pay the wage increase. And when there is a profit – well, that’s the reason people risk so much to go into business, to make money. At the heart of every investment is profit – take the profit away and the investment will leave as well.
Employers will make economically rational choices in response to increasing labor costs, whether those increases come from supply and demand or new government mandates. That’s how our economy works. So before anyone celebrates new federal overtime regulations as a victory for working people they need to be clear about how the new labor costs will be paid for. Not with redistribution of wealth from the rich to the poor, but much more likely by redistributing costs to consumers, other workers and robots. A pyrrhic victory to be sure.
If we truly want a more prosperous economy that shares wealth with everyone we’ll need more than new regulations. We’ll need to create new wealth.