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On the Need to Raise the Salary Threshold for Overtime Eligibility
Only Americans who make less than $23,660 a year are automatically eligible for time-and-a-half pay after working 40 hours a week. Today, that’s only 11 percent of salaried workers. It didn’t used to be this way, and it doesn’t have to stay this way, argues venture capitalist Nick Hanauer.
Just like President Obama has taken executive action on immigration, Hanauer believes the president can and should take executive action to raise the salary threshold for overtime eligibility.
Hanauer’s a billionaire who made his fortune as one of the original investors in Amazon. The current rules are written to benefit wealthy capitalists like him, he admits. So, you might ask, why does Hanauer care about overtime pay for people who make less, much less, than he does?
“ Ironically,” he writes, when “you earn less, and unemployment is high, it even hurts capitalists like me.” That won’t surprise Making Sen$e readers who’ve heard his brand of “middle-out economics.” Closing the income gap wouldn’t just benefit the middle class; a stronger middle class is the source of economic prosperity for everyone, he thinks. Watch him make that argument to Paul Solman below.
Making Sen$e first caught up with Hanauer in Seattle last spring, where he was pushing for the city to pass a higher minimum wage. Just as the minimum wage is crucial to improving the economic outlook of low-wage workers, overtime pay is essential to the middle class’s prosperity — and everyone else’s. Hanauer explains why that matters to him, as a venture capitalist, in the following essay which first appeared in Politico Magazine.
– Simone Pathe, Making Sen$e Editor
This is why the middle class can't get ahead
by Nick Hanauer
If you’re in the American middle class—or what’s left of it—here’s how you probably feel. You feel like you’re struggling harder than your parents did, working longer hours than ever before, and yet falling further and further behind. The reason you feel this way is because most of you are—falling further behind, that is. Adjusted for inflation, average salaries have actually dropped since the early 1970s, while hours for full-time workers have steadily climbed.
Meanwhile, a handful of wealthy capitalists like me are growing wealthy beyond our parents’ wildest dreams, in large part because we’re able to take advantage of your misfortune.
So what’s changed since the 1960s and 1970s? Overtime pay, in part. Your parents got a lot of it, and you don’t. And it turns out that fair overtime standards are to the middle class what the minimum wage is to low-income workers: not everything, but an indispensable labor protection that is absolutely essential to creating a broad and thriving middle class.
In 1975, more than 65 percent of salaried American workers earned time-and-a-half pay for every hour worked over 40 hours a week. Not because capitalists back then were more generous, but because it was the law. It still is the law, except that the value of the threshold for overtime pay—the salary level at which employers are required to pay overtime—has been allowed to erode to less than the poverty line for a family of four today. Only workers earning an annual income of under $23,660 qualify for mandatory overtime. You know many people like that? Probably not. By 2013, just 11 percent of salaried workers qualified for overtime pay, according to a report published by the Economic Policy Institute. And so business owners like me have been able to make the other 89 percent of you work unlimited overtime hours for no additional pay at all.
In my defense, I’m only playing by the rules—rules written by and for wealthy capitalists like me. But the main point is this: These are rules that President Barack Obama has the power to change with the stroke of a pen, and with no prior congressional approval. The president could, on his own, restore federal overtime standards to where they were at their 1975 peak, covering the same 65 percent of salaried workers who were covered 40 years ago. If he did that, about 10.4 million Americans would suddenly be earning a lot more than they are now. Last March, Obama asked the Labor Department to update “outdated” regulations that mean, as the president put it in his memo, “millions of Americans lack the protections of overtime and even the right to the minimum wage.” But Obama was not specific about the changes he wanted to see.
So let me be specific. To get the country back to the same equitable standards we had in 1975, the Department of Labor would simply have to raise the overtime threshold to $69,000. In other words, if you earn $69,000 or less, the law would require that you be paid overtime when you worked more than 40 hours a week. That’s 10.4 million middle-class Americans with more money in their pockets or more time to spend with friends and family. And if corporate America didn’t want to pay you time and a half, it would need to hire hundreds of thousands of additional workers to pick up the slack—slashing the unemployment rate and forcing up wages.
The Obama administration could, on its own, go even further. Many millions of Americans are currently exempt from the overtime rules—teachers, federal employees, doctors, computer professionals, etc.—and corporate leaders are lobbying hard to expand “computer professional” to mean just about anybody who uses a computer. Which is almost everybody. But were the Labor Department instead to narrow these exemptions, millions more Americans would receive the overtime pay they deserve. Why, you might ask, are so many workers exempted from overtime? That’s a fair question. To be truthful, I have no earthly idea why. What I can tell you is that these exemptions work out very well for your employers.
Since the Republican Party’s takeover of both houses of Congress in the midterm elections, all the talk in Washington has been about what won’t get done because of gridlock between the White House and Capitol Hill. And Obama has talked of moving things forward by making unilateral changes to immigration law and climate protections.
But what about the most basic need of all—jump-starting the real economy by giving more middle-class Americans a fair shake? You would think that for a Democratic administration, raising the threshold back to where it once was would be a no-brainer, but I have grave doubts that administration officials are heading in this direction. In fact they are likely to raise the threshold only partly, and the Obama administration has not yet grappled with the broader question of how moves such as this are critical to helping to restore America’s middle class. How do I know? Intuition. OK, I admit it, more than intuition. I’ve had conversations with administration officials about their forthcoming policy changes. And the scuttlebutt out of the Labor Department looks promising—for corporations. Not the middle class.
It is my sense, based on my conversations with government officials, that the administration is buying the line from corporate lobbyists who are arguing that such rule changes would devastate their bottom lines, forcing them to lay off workers. You know, the old trickle-down gambit—if workers earn more money, it would be bad for business, the economy and workers. The Obama team, in other words, is buying into the same discredited theories that were used to erode the threshold in the first place. Officials will very likely raise the overtime threshold just enough to say they’re doing something, without actually doing much of anything for the middle class or our demand-starved economy at all.
But here’s a little secret from the corner office: The arguments that the corporate lobbyists are making—about how badly business will be hurt—just don’t add up. What is adding up instead are the trillions of dollars in corporate profits and stock gains that corporations have made over the same decades that your hours climbed and your wages fell. From 1950 to 1980, during the good old days of U.S. economic might—the era in which the Great American Middle Class was created—corporate profits averaged a healthy 6 percent of GDP. But since then, corporate profits have doubled to more than 12 percent of GDP.
That’s about a trillion dollars more a year in profit. And since then, wages as a percentage of GDP have fallen, you guessed it, by about the same 6 percent or 7 percent of GDP. Coincidence? Probably not.
What very few Americans seem to understand is that that extra trillion dollars isn’t profit because it had to be, or needs to be or should be. That extra trillion dollars is profit because powerful people like me prefer it to be. It could have been spent on your wages. Or it could have gone into discounts to you, the consumer. We capitalists will tell you that our increasing profits are the result of some complex economic force with the immutability and righteousness of divine law. But the truth is, it is simply a result of a difference in negotiating power. As in, we have it. And you don’t.
Still, it’s hard to blame the administration for doing so little to defend middle-class workers when most middle-class workers aren’t even aware that they’re being ripped off. But I know. And a lot of other business owners know. We just don’t talk about it. You see, we capitalists will never actually ask you to work overtime. I don’t even track your hours. I just make it clear that I trust you to get your job done in the time allotted. And then I hand you twice as much work as you can reasonably do in a 40-hour week. But this downward pressure on wages doesn’t end there.
In the absence of a law requiring me to pay you overtime if you earn under a certain amount, you end up working harder—and the harder you work, the fewer employees I need. The fewer employees I need, the higher the unemployment rate. The higher the unemployment rate, the more leverage I have to “encourage” you to “do what it takes” to keep your job. And so you work even more hours, pushing unemployment up and wages down. And that, my friends, is one of the little tricks that keeps you poor and me rich.
This is why, in a recent Gallup poll, salaried Americans now report working an average of 47 hours a week, not the allegedly standard 40. And 18 percent of you report working more than 60 hours per week. Yet at the same time, you’re taking only about 77 percent of your paid time off. According to a survey commissioned by the U.S. Travel Association, U.S. workers now use an average of only 16 vacation days a year out of the nearly 21 days they earn—the lowest in more than four decades. Why? Often because they’re terrified of working fewer hours and falling short of their employers’ demands for ever more productivity. And many of these unused vacation days are forfeited: an estimated $52.4 billion worth each year that goes to owners like me.
Now obviously, take away our license to force 10.4 million Americans to work extra hours for nothing, and smart capitalists like me would try to limit overtime as much as possible. I mean, time-and-a-half pay sure adds up fast! So many of you would be unlikely to see much of an immediate bump in take-home pay. Instead, we capitalists would be forced to hire millions more people to do the work you currently do for free. That would drive down unemployment. And a tighter labor market would drive up wages for the first time in 40 years.
So you see, when I say that the overtime threshold is the minimum wage for the middle class, I’m not just playing with words. In the exact same way that the erosion of the federal minimum wage—from an inflation-adjusted peak of about $11 an hour in 1968 to only $7.25 an hour today—has held down wages for low-income Americans, the simultaneous erosion of the overtime threshold has also held down wages for the American middle class. And just like raising the minimum wage would nudge up incomes for those workers earning somewhat above it, restoring the overtime threshold would push up incomes for many workers currently earning above $69,000 too.
What Do Executives Do With All Their Money?
Of course, capitalists like me will tell you that when we cut into profits, the entire economy is damaged. And think of all the investment that corporate profits make possible. What do executives like me do with all that extra money? Why, invest in creating good-paying jobs for middle-class Americans like you, of course.
Unfortunately, that’s not exactly true either. Mostly, we use profits to manipulate our stock price for personal gain.
Here’s a little history that will explain how: Back in the 1970s, when the share of total U.S. income that the top 0.1 percent of households got was at a 100-year low, corporate executives received most of their compensation in the form of a salary, just like you. But since the late 1980s, the largest component of income for the top 0.1 percent has been stock-based pay. This shift toward compensation via stock options and grants means that CEOs are directly incentivized to increase the share price of their company’s stock.
Building better products that lead to higher sales and fatter margins is the traditional way for a CEO to push up the price of his stock. But that’s so old-fashioned. So yesterday. Instead, ever since a former Wall Street CEO in charge of the Securities and Exchange Commission back in 1982 loosened the rules that define stock manipulation (beginning to see a historical pattern here?), U.S. corporations have increasingly resorted to stock buybacks to prop up share prices. According to a report in the Harvard Business Review by professor William Lazonkick—“Profits Without Prosperity”—over the past 10 years, America’s largest companies, those making up the S&P 500, have devoted a staggering 54 percent of their profits to buying back shares, reducing the total number outstanding and thus increasing the value of the remaining shares owned by capitalists like me.
A stock buyback, in case you are wondering, is when a public company buys its own shares. “Why on earth would a company do that?” you ask. To push the stock price higher, of course—which benefits senior managers who are all paid in stock—rather than, say, investing in R&D or in building new factories. Or paying you overtime for all those extra hours you work.
I want to be clear: I’ve done stock buybacks. We all do it. In order to be a public company today, you practically can’t avoid it, despite how obviously corrupt it is. Ever wonder why the stock market is soaring again, while the real economy is just slogging along? Buybacks are a big reason. According to data compiled by Mustafa Erdem Sakinç of The Academic-Industry Research Network, public U.S. corporations of all sizes have spent an astonishing $6.9 trillion on stock buybacks over the past decade alone. $6.9 trillion! That’s about enough to run the entire federal government—for two years! Let me tell you how it works. Your institutional investors will call you, maybe after some bad news that drives your stock down a bit, and they’ll say, “Hey, your stock is undervalued, don’t you think? And if you guys won’t support your own stock, then why should we?” Hint, hint. Nudge, nudge. But you will not be able to grasp the size of this, relative to your situation, without some examples.
Take low-wage king Wal-Mart. Over the past 10 years, according to data compiled from its public filings, Wal-Mart has spent more than $65.4 billion on stock buybacks—about 47 percent of its profits. That’s an average of more than $6.5 billion a year in stock buybacks, enough to give each of its 1.4 million U.S. workers a $4,670-a-year raise. It is also, coincidentally, an amount roughly equivalent to the estimated $6.2 billion Wal-Mart costs U.S. taxpayers every year in food stamps, Medicaid, subsidized housing and other public assistance to its many impoverished employees.
And further up the wage scale there’s IBM. Once an icon of innovation for its proud legacy of investing in basic research, the 21st-century IBM has instead chosen to spend an astounding $117.5 billion on stock buybacks since 2003—a remarkable 89.4 percent of total profits.
What else might we have done with that $6.9 trillion other than manipulate stock prices? Well, we could have forgiven the $1 trillion in student debt currently crippling the purchasing power of young Americans; funded the looming $3.6 trillion maintenance backlog on our roads, bridges, dams, schools and the rest of our nation’s public infrastructure; boosted our nation’s annual R&D expenditures by more than 20 percent a year; and still have enough money leftover to buy every man, woman and child in the U.S. a round of drinks. Every Friday night. For the next 15 years.
Or, we could spend the approximately $700 billion in stock buybacks per year putting all 9 million unemployed Americans back to work at more than 2.5 times our nation’s pitiful $28,000 median wage.
If this sounds a little bit like a Ponzi scheme, that’s because it is. I buy my shares back from investors and speculators, who then use that money to buy more shares. We get richer riding this merry-go-round, but the money never touches the real economy. Perhaps you’ve wondered how the stock market hit 17,000 while, at the same time, five years after the end of the Great Recession, the real economy that you live in still kind of sucks? Stock buybacks.
So if you’re still thinking that higher wages or fewer hours of overtime for you and your coworkers might bankrupt the public company you work for, I encourage you to do this: Send an email to your CFO and ask him or her how much your company has spent on stock buybacks over the past 10 years in both dollars and in percent of pretax profits? Seriously. Do it right now. And while you’re waiting for a reply from your CFO, let’s have an honest conversation about the way the economy really works.
But Don’t Rich People Create Jobs?
Forget everything you’ve been told about how the rich are job creators—that the more money we have, the more we invest, the more jobs we create, and the better the economy is for everybody. As our epidemic of stock buybacks clearly illustrates, capitalists like me already have more money than we know what to do with. Indeed, smart investors are struggling to cope with what Bain & Co. has termed “capital superabundance,” marked by a tripling of global capital since 1990 despite the ongoing stagnation of the underlying economy. Meanwhile, even as this glut of financial capital continues to grow, new technologies are dramatically reducing demand for capital.
It once cost billions to finance a new steel mill, the symbol of the old economy. But the new economy just isn’t nearly as capital-intensive—in other words, companies don’t need anything like this huge amount of reinvestment in stocks. For example, take Amazon. I was an early investor—it’s where I made much of my fortune. How much capital did Jeff Bezos initially raise to start up Amazon? One million dollars. Last year, Amazon reported over $74 billion in sales. It is this “investment supply–demand imbalance,” writes Bain, that is decisively shifting power “from owners of capital to owners of good ideas.”
In the information economy of the 21st century, it is not capital accumulation that creates growth and prosperity, but, rather, the virtuous cycle of innovation and demand. The more innovators and entrepreneurs we have converting ideas into products and services, the higher our standard of living, and the more people who can afford to consume these products and services, the greater the incentive to innovate. Thus, the key to growth and prosperity is to fully include as many Americans as possible in our economy, both as innovators and consumers.
In plain English, the real economy is you: Raise wages, and one increases demand. Increase demand and one increases jobs, wages and innovation. The real economy is simply the interplay between consumers and businesses. On the other hand, as we’ve learned from the past 40 years of slow growth and record stock buybacks, not even an infinite supply of capital can persuade a CEO to hire more workers absent demand for the products and services they produce.
The twisted irony is, when you work more hours for less pay, you hurt not only yourself, you hurt the real economy by depressing wages, increasing unemployment and reducing demand and innovation. Ironically, when you earn less, and unemployment is high, it even hurts capitalists like me.
Which brings us back to President Obama. He is hearing daily from corporate executives and lobbyists that raising your wages would be bad. For you. So he won’t, unless he hears from you—all of you—demanding the same fair overtime protections for today’s middle class that were once enjoyed by your parents.
Contact the White House. Do it for yourself. Or, at the very least, have the courtesy to do it for me. Because honestly, I’m beginning to run out of customers. In the meanwhile, I’ve got to go buy back more shares ahead of the next earnings report.
December 3, 2014
Bill McGaughey's comment and proposal
Follow-up on Hanauer’s article
Nick Hanauer’s article suggests a new way of looking at hours reductions if you are interested in approaching this through adjustments in the Fair Labor Standards Act.
The breakthrough concept is that the U.S. President currently has the authority to raise the overtime threshold. He says that this threshold would have to be raised to $69,000 a year to restore coverage to what it was in 1975. Obama could do this with a stroke of his pen; but he will not.
I see a problem with overtime pay in that it is an incentive for employees to work longer hours - thus defeating the intent of the law in reducing hours. My solution has always been the politically unpalatable one of urging that the government tax away the half-time premium instead of giving it to the employee as a wage supplement. The goal of raising wages - a good one - is accomplished through the free market as labor supply is reduced through shorter work hours but labor demand is maintained.
Therefore, my proposal would be to reduce work hours in stages with a mechanism for maintaining wage levels:
In the first stage, the President would expand coverage under the Fair Labor Standard Act - i.e., shrink the exempt category - while also, through legislation, require that half of the premium go to the government rather than to the employee. The other half, going to the employee, would help to maintain wages. There would be a substantial increase in income for employees now covered by FLSA who were not previously covered, unless the employer does bring weekly hours down to 40. (In that case, wages would be maintained due to the shrinking supply of labor.)
In the second stage, the standard workweek under the Fair Labor Standards Act would be reduced in stages from 40 hours to 32 hours. The extra half of half-time premium going to the employee would meanwhile be phased out. There would then be no incentive to schedule or work overtime. However, employee wages would be maintained due to the shrinking supply of labor.
As Hanauer suggests, the key is really to expand coverage under the FLSA so that more middle-income people receive overtime pay for working hours beyond 40. In some cases, the law might have to be changed to expand the coverage. I see no reason why the FLSA should not cover all employees below the level where they can set their own level of compensation (including self-employed people).
At this point, let’s not discuss whether the above proposal is politically realistic.
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