Blair and Doug brought up yesterday's Wall Street Journal article on overtime.
Doug asked,
>Any thoughts on this? Are conservative unionists speaking on behalf of
>"working women," or is this a real feminist position?
and Blair asked,
>The question is then, what is labor's objection really? In other words,
>shouldn't we push labor to get behind this proposal full force in order to
>shape it in accord with workers' needs, rather than just saying "no?"
I haven't seem the WSJ piece yet (thanks for the tip). But I circulated a
provocative fable on a few other lists two days ago on "Time and a half and
a tooth fairy too." Since OT seems to be in the news, I'll send it out to
PEN-L.
Please be forewarned, in the fable's prologue, I make the perhaps
provocative claim: THE OVERTIME PREMIUM ENCOURAGES THE USE OF OVERTIME AND
BLOCKS THE WAY TO SHORTER HOURS OF WORK. Of course, I have the charts,
tables, equations and sophisticated econometric models to back up my rash
claim and have had quite a number of requests to post the documentation. So,
in a few days to a week, the more scholarly version of this fable will start
to emerge. Anyone who wants to take premature cheap shots at my argument is
welcome to do so, provided they promise to eat the truckload of footnotes
that will show up in their driveway in a week. And now, without further ado...
**************************************
TIME AND A HALF AND TOOTH FAIRIES, TOO
Tom Walker
The overtime premium ("time and a half") offers a striking example of good
intentions gone awry. Few would doubt that the intention of the overtime
premium is to discourage longer hours of work, but to do so in a way that
gives employers some flexibility to meet emergencies and peak periods of
demand. Although some observers question the effectiveness of the premium in
curbing overtime, I have yet to find one who would state that the overtime
premium actually *encourages the use of overtime* and blocks the way to
shorter hours of work. So I'll say it now:
THE OVERTIME PREMIUM ENCOURAGES THE USE OF OVERTIME AND BLOCKS THE WAY TO
SHORTER HOURS OF WORK.
How so?
My argument takes its cue from Ronald G. Ehrenberg's 1971 study _Fringe
Benefits and Overtime Behavior_. In that study, Ehrenberg showed that high
fixed labour costs (such as fringe benefits) offset the overtime premium and
lead to more frequent use of overtime. I'd push the argument one step
further to say that overtime premiums are probably a major cause of the
steep and steady increase in employer paid fringe benefits that occurred in
the three decades after World War II. In other words, I'd say the offset was
deliberate.
It isn't possible to be inside the heads of corporate managers and union
negotiators from four or five decades ago, but it is possible to do a few
simple calculations and reconstruct the cost options that they might have
had before them. A simple story can help to illustrate.
Let's now go behind the scenes of an historic collective bargaining session
between the United Sisterhood of Tooth Fairies and Allied Workers (USTFAW)
and Mammoth Dental Finance Corp. The year is 1947 -- and YOU are there...
The demand for tooth fairy service has always been unpredictable. Some
nights, it takes a fairy 10 or 12 hours to visit all the children who have
lost teeth that day. Traditionally, Mammoth has paid it's fairies by the
hour and has provided no benefits or time off with pay -- "an hour's work
for an hour's pay" was the founder's slogan. Starting this year, however,
Mammoth is feeling the impact of a nine-year old law requiring it to pay its
fairies time and a half for work over 8 hours in a day (night) or 40 in a week.
The rule has caused Mammoth's accountant, Peter Pencil, some consternation.
Not only has it increased the company's average cost per hour actually
worked, it has made that cost less predictable. Now, whenever there's a
surge in demand, there's also a surge in labour costs. Pencil is not pleased.
But Pencil knows his fractions, and he's determined to find a way around the
time and a half dilemma. A careful reading of the overtime law gives him an
idea. "Let's see, it says here 'the overtime rate shall be equivalent to
time and one half the employee's *regular rate of pay*'. Hmmm, doesn't say
anything about 'fringe benefits'. That's it! If we pay our fairies
two-thirds of their regular wages in wages and one third in 'fringe
benefits', then we'll only have to pay them straight time for overtime
[two-thirds times one and one half equals one]! But wait a minute -- these
fairies aren't going to be too happy about a one third pay cut. We'd better
introduce this thing gradually."
Armed with Pencil's cost calculations, the company negotiators enter into
collective bargaining with USTFAW. The fairies are pulling for a 10% raise
-- well within the company's ability to pay. But management throws a curve.
"O.K., we'll give you the 10%. But our cost calculations show that we'd be
more competitive if we pay half of that as an increase in wages and the
other half as a fringe benefit -- say a dental plan. You'll actually get
more than you bargained for in value, because the fringe benefit is tax exempt."
The union negotiators look at each other in bewilderment. They aren't used
to the company giving in on the first round. "How could this be so easy?
We'd better do some calculations." They sharpen their pencils and adjourn to
a back room. A few minutes later, they return shrugging their shoulders,
shaking their heads and extending their hands to company negotiators.
A few hours later, the negotiating team presents the tentative deal to the
membership for ratification. "The company negotiators were stubborn, but we
hung in there and got a 'package' that gives us the full percentage increase
we asked for. There's even a few bonuses -- as a group, our new dental plan
will cost us less than if we each went out and bought dental insurance on
the market. And we won't have to pay taxes on the money the company pays for
the dental plan." Being only too aware of the rising cost of dental care,
the fairies eagerly approve the new contract.
A new era of labour-management relations had dawned.
Fast forward to the 1990s... Benefits now account for around 30% of
Mammoth's labor costs. The overtime premium has, in effect, been wiped out
by the cumulative effect of the fixed-cost benefits. A Mammoth week of 46
hours costs the company about the same per hour worked as a standard 40 hour
week. Fairies average three to four hours a week of overtime. Fifty and
sixty hour weeks are not unheard of.
But tooth fairy demographics have changed, too. More fairies with young
children are in the work force. Two-earner fairy households are common. The
union is now seeking more family-friendly work time schedules -- both for
the sake of its own membership and to help relieve the chronic unemployment
that is widespread in Fairyland.
Peter Pencil's successor, Samuel P. Spreadsheet has taken the union demands
for work sharing and job sharing back to his office for closer examination.
"Hmmm," Spreadsheet calculates,"even if workers give up one hour's pay for
each hour less they work, the average cost per hour goes up. This is out of
the question. We won't be able to compete in today's global markets. Nope.
No way. Never."
Armed with Spreadsheet's figures, management tosses the work sharing
proposals in the waste paper basket. "Look," they tell the union
negotiators, "we've got to be working *more* hours in today's competitive
climate, not less -- our fixed costs are through the roof. Your members are
lucky to have a job with good pay and benefits. Don't bother us with
frivolous demands. This worksharing stuff is utopian, pie-in-the-sky,
airy-fairy wishful thinking. Get real."
The union team can see they're getting nowhere with the work sharing
proposal. "Maybe, we could get the government to change the laws," suggests
the union's chief economist. "Raise the overtime premium from time and a
half to double time. Make the overtime premium payable after 32 hours,
instead of 40."
Everyone nods -- it's unclear as to whether in agreement or off to sleep.
"Yeah, sure," one small, skeptical voice breaks in, "You guys still believe
in the 'overtime premium'? I suppose you believe in the tooth fairy, too!"
(Copyright 1997. Permission granted to circulate this article intact.)
Regards,
Tom Walker
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