Ruling against overtime is wrong in so many ways
Judge Amos Mazzant’s opinion to block the Department of Labor’s new overtime rule is poorly reasoned and factually inaccurate. Judge Mazzant does not know the history of the Fair Labor Standards Act and he appears not to understand Chevron deference, a rule constructed by the U.S. Supreme Court to guide judicial review of federal agency regulatory decisions.
Let’s begin with Judge Mazzant’s astonishing unfamiliarity with the FLSA. Judge Mazzant incorrectly implies on page 2 of his Opinion that the initial regulations that accompanied the enactment of the FLSA in 1938 did not include a salary test:
“The Department’s initial regulations, found in 29 C.F.R. § 541, defined ‘executive,’ ‘administrative,’ and ‘professional’ employees based on the duties they performed in 1938. Two years later, the Department revised the regulations to require EAP employees to be paid on a salary basis.”
In fact, it was not “two years later” but right from the get-go on October 20, 1938 that the Secretary defined the exemption for executive and administrative employees to require a minimum salary of “not less than $30 (exclusive of board, lodging, or other facilities) for a workweek.”
Already a big gap between Trump’s promises to the middle class and his policies
During his campaign, President-elect Donald Trump promised that he would take the side of American workers against economic elites when evaluating policy. Yet, the policy proposals he put forth during the campaign had nothing in them that would actually help working- and middle-class Americans. Now that more plans and potential cabinet appointments are coming into focus, it looks worse than many of us thought even before the election. Across a broad range of crucial issues, the incoming Trump administration appears likely to betray the promises he made to the American middle class. Here’s a rough sketch of how.
Taxes
Trump’s tax policy proposals are crystal clear about who will benefit the most—and it’s not working- or middle-class families. Despite crowing during the campaign about raising taxes on “hedge fund guys,” the tax plan Trump released raises one small tax on hedge fund guys (eliminating the so-called carried interest loophole), and then gives them a hundred times more back in the form of lower taxes everywhere else. The top 1 percent will get 47 percent of the total benefits in the Trump tax plan, while the bottom 60 percent will get just 10 percent. Worse, large numbers of working-class taxpayers will see tax increases under Trump. Yes, increases. Because that money is needed to make sure that private equity managers can see their top tax rates moved down to 15 percent.
Trump’s infrastructure plan is not a simple public-private partnership plan, and won’t lead to much new investment
President-elect Donald Trump has indicated that one of his first priorities will be a plan to boost infrastructure investment. Normally, this would be welcome news for those of us who have been arguing for years that increased public investment—including but not limited to infrastructure investments—should be a top-tier economic priority. Further, it also seems like a rare opportunity for bipartisanship—after all, Hillary Clinton made infrastructure investment a priority of her campaign’s policy platform, as well.
The still-sketchy details of Trump’s plan, however, are a cause for concern. What we know is that the plan is to provide a tax credit equal to 82 percent of the equity amount that investors commit to financing infrastructure. In the coming days, this will invariably be described as creating public-private partnerships (P3s). P3s are a standard model for financing infrastructure that can in theory be used with little downside compared to direct public provision. However, this description of the Trump plan is both not that comforting and incorrect. It’s not comforting because the real-world record of P3s is much spottier than textbook models would suggest. And it’s not accurate because Trump’s plan isn’t as simple as encouraging new P3s. It is instead (at least in its embryonic form), simply a way to transfer money to developers with no guarantee at all that net new investments are made.
Let’s start with describing what a textbook P3 would look like and what the rationale for using it would be. P3s are long-term contracts between the state and private companies to build and maintain infrastructure. They can be thought of as sitting somewhere between standard public provision and full privatization of infrastructure. Say that a state or local government wants to build a new road, but is constrained for some reason (usually simpleminded anti-tax politics) from raising the money to publicly finance it. It’s important the democratically elected and accountable government ensure the project is in the public interest. Having done this, the government can then negotiate with private financiers and developers to get the project built. To reduce costs and provide incentives for development, tax breaks are sometimes provided to holders of bonds issued by the private entities, and the private entities also receive a revenue stream of some kind in exchange for their investment. Often this is an explicit user fee, like a toll for using a road.
CBO inflates its estimates of employer compliance costs
CBO released a report on the economic impact of repealing the Department of Labor’s new overtime rule, which raises the salary level for exemption from $23,660 a year to $47,476, thereby making about 4 million employees newly eligible for overtime pay and strengthening the right to overtime pay for about 8.5 million more. CBO concludes that repealing the new rule would have no appreciable effect on employment, would cut the pay of about 900,000 salaried employees who would lose the right to be paid for overtime they actually work, and would increase employer profits.
CBO’s analysis differs in significant ways from the Department of Labor’s, which predicted much greater pay raises for newly eligible workers and much lower compliance costs for employers. CBO exaggerates the extent to which repealing the rule would increase employer profits because it inflates the compliance costs that employers would avoid if the rule were repealed.
How will a Trump administration lift wages for the vast majority of Americans?
President-elect Donald Trump succeeded, in part, through an appeal to working class voters who have seen their incomes stagnate or fall for decades, the jobs they depended on moved off-shore, and their hopes for a secure retirement dwindle.
Trump correctly told them that U.S. trade treaties contributed to these problems and that the Trans-Pacific Partnership would only make matters worse. However, these trade treaties are just one way that policy has indeed been rigged to suppress wages for the vast majority of Americans. Millions of working Americans of all races are struggling, while the benefits of growth have gone only to people at the very top of the income ladder.
Working class Americans want what everyone wants: good jobs and hope for a better future. Now, the Trump administration and a GOP congress will have to deliver. How will a Trump administration lift wages for low and middle income Americans? As EPI has been promoting for decades, there are specific policies that will raise wages. The only way to raise wages for the vast majority of American workers is to give workers more power. For far too long, employers have held all the cards.
Trump has called for a higher minimum wage. A truly bold increase in the minimum wage would lift pay for the bottom quarter or more of the workforce.
The TPP is a back door for dumped and subsidized imports from China; it would enhance, not limit, China’s influence in the region
President Obama has built his closing case for the Trans-Pacific Partnership on a political argument, saying “…we can’t let countries like China write the rules of the global economy. We should write those rules.” But it is both arrogant and wrong to think that the United States has the power to shape the rules governing China’s relationship to TPP signatories. As of today, China has already established deeper trade ties than the United States with the TPP nations. Further, congressional approval of the TPP would actually lock in those advantages for China. China has a large trade surplus with the TPP countries, and crucial terms of the agreement (specifically weak rules of origin (ROO) requirements, which we’ll talk about in detail below) would provide a back-door guarantee for China and other non-TPP members to duty-free access to U.S. and other TPP markets. This would be especially significant for autos and auto parts, as well as other key products. TPP exporters are not going to turn away from their suppliers in China just because they signed a trade deal with the United States.
The United States has a massive trade deficit with China that has taken on added significance in the light of the proposed TPP agreement between the United States and 11 other Pacific Rim countries. While China is not party to the TPP, it is a major force behind a larger East Asian co-production system that uses unfair trade (dumping, subsidies, excess capacity, export restrictions, and more), coupled with currency manipulation and misalignment, to make U.S. goods more costly and thus less competitive in China, the TPP and in other markets.
The United States also had a large trade deficit with the TPP countries in 2015 that cost 2 million U.S. jobs. Flawed trade and investment deals, such as the North American Free Trade Agreement (NAFTA), plus the currency manipulation and unfair trade by some TPP members account for many of those lost jobs (note that Mexico and Canada are TPP countries). In addition, analysis developed here demonstrates that a substantial share of these TPP job losses can be directly linked to trade between China and the other members of the TPP. Specifically, most of the TPP countries run large trade deficits with China while running large, offsetting trade surpluses with the United States. Thus, it appears that at least some TPP producers are buying parts and components from China and re-exporting them in the form of finished goods to the United States.
Setting a higher bar for the economy—and policymakers
There was some good news in this morning’s Employment Situation Report. The economy added 161,000 new jobs in October—enough to bring in players off the bench. Perhaps most significantly, nominal wage growth increased 2.8 percent over the year, another step-up over the pace of growth in recent years and a sign of a tightening labor market, where workers may be starting to gain some leverage. All in all, last month was a solid step closer to full employment, but we still have not reached it yet. It’s important to remember that these positive highlights don’t mean we are at full employment. That’s why the Federal Reserve made the right decision to leave rates alone earlier this week. The economy continues to move in the right direction, but considerable slack remains and the recovery has yet to be fully realized in all parts of the economy or for all workers.
This month and this year, the economy has hit some milestones, but I’d argue that those are relatively low bars for success. For example, for the first time this recovery, the prime-age employment-to-population ratio (EPOP) exceeded its low point of the last two business cycles. As seen in the figure below, prime-age EPOP hit 78.2 percent in October, just surpassing its level in February 1993 of 78.1 percent. Is it good that the prime-age EPOP is rising? Yes, but, prime-age EPOPS remain below the low point of the last recession, let alone levels that could constitute a full employment economy. That’s what I mean by a “low bar.” But, the uptick last month is a good sign and I look forward to continued progress on this key measure.
What to Watch on Jobs Day: A steadily improving, but still-weak labor market for the next president
Amidst lots of questions about the economy heading into the presidential election next week, I thought it would be appropriate to provide a brief analysis of where the economy is today. Since the Great Recession and aftermath, the labor market has improved at a remarkably consistent and steady rate. But as steady and long-lived as the recovery has been, it has not yet been fully cemented into a healthy, full employment economy. The improvement is easy to document. It can be obviously seen in the underlying growth in total payroll employment and precipitous drop in the unemployment rate. The still-unhealed damage is illustrated by remaining slack that has led to still slower than targeted nominal wage growth and underperforming prime-age employment-to-population ratio.
For its part, aside from a tap last December, the Federal Reserve has been keeping their foot off the brakes, letting the labor market soak up the slack. They should continue to do so until it’s all gone. In the last year, the labor force participation rate has risen, while the unemployment rate held steady. So, yes, the economy is on the right track. And, if payroll employment stays on course, the unemployment rate will start coming down again even as missing workers continue to enter or re-enter the labor force. And, as this happens, workers and would-be workers will be in shorter supply, finally giving them the leverage to bid up their wages.
What the UK decision implies for Uber drivers in the U.S.
This blog was first posted at OnLabor.
As Jon reported this morning, an employment tribunal in London has concluded that Uber drivers are not self-employed independent contractors, but rather Uber workers. The tribunal’s decision is available here, and I recommend it: it’s full of details regarding the relationship between Uber and its drivers. And although legal tests differ across jurisdictions, what the U.K. tribunal found has clear relevance for the question of whether Uber drivers in the U.S. meet the definition of “employee” under U.S. labor and employment laws. To put it bluntly, what the tribunal finds clearly confirms the conclusion that Uber drivers are employees under U.S. standards. The opinion is 40 single spaced pages, but here are some (and just some) of the relevant findings that led the tribunal to conclude that drivers are workers under UK law:
Fed should hold steady—the economy had “room to run” over past year and may well have more in the next year
The Fed’s Federal Open Market Committee (FOMC) will debate again this week whether or not they should raise interest rates to slow the economic recovery in an effort to forestall potential inflation.
The debate over when the Federal Reserve should begin raising its short-term policy interest really began in earnest in September 2015. In the month before the FOMC met in September 2015, futures markets put the odds of a rate hike at over 50 percent. It is likely that all that kept the hike from happening in September of that year was the surprise financial market declines in China, which spilled over into the American stock exchanges for a spell. In December 2015, after this short-term drama passed, the Fed raised rates for the first time in seven years.
In the debate that accompanied the run-up to the September 2015 meeting, those arguing for further patience from the Fed (like this author) argued that there remained lots of slack remaining in the labor market, and that this slack would contain inflationary pressures. One source of slack identified was a potential firming-up of labor force participation, which had dropped considerably over the recovery.