Reference no: EM131456998
Workers covered by the Fair Labor Standards Act (FLSA) must receive overtime pay for hours worked in excess of 40-per-week of at least 1.5 times their regular pay rate. However, the FLSA exempts "professional, administrative and executive" employees from overtime coverage if their weekly earnings exceed a given amount - the so-called "white collar exemption".
In August 2004, Bush's Department of Labor (DOL) implemented rules that exempted workers with weekly earnings of $455-or-more ($23,660 annually), and reclassified low-level work supervisors as "executives". As a result, many workers throughout the United States lost their overtime rights.
On July 6, 2015, Obama's DOL provided for public review a proposal to change the white-collar exemption. The final rule, published on May 18, 2016, sought to raise the white collar exemption to $913-per-week ($47,476 annually); with an effective date of December 1, 2016. An estimated 4.2 million workers across the country were expected to become eligible for overtime pay. On November 22, 2016, a federal district court in Texas blocked the rule change, siding with businesses and states opposed to the expansion of overtime rights.
a) Consider an individual who currently has a job at Walmart that pays $15-per-hour. As part of his job, he trains and supervises three newly-hired employees. Is this individual eligible for overtime pay under the current exemption rule from 2004? How about under the proposed exemption rule?
b) Suppose this person can work a maximum of 60 hours-per-week. Draw this person's budget constraint under both the current and blocked exemption rules, assuming that he receives no unearned income.
c) For a set of preferences that you specify, draw this individual's optimal choice of work hours in each scenario. For your assumed indifference curves, does he want to work more or fewer hours if Trump allows the 2016 rule change to go through? Illustrate and label the income and substitution effects for this worker. Which effect dominates in your figure?
d) For your assumed preferences, what is this person's marginal rate of substitution (MRS) between income and leisure? Explain how your results would change (if at all) if this person's MRS was lower.
Industry groups have lobbied heavily against the overtime regulation change since it was first proposed in July of 2015. They claim that the increase in the white-collar-exemption threshold would raise labor costs and put employers in the difficult position of either raising salaries to keep workers exempt; converting salaried workers to hourly pay; or firing employees.
e) Suppose that Walmart's input and output markets are perfectly competitive - e.g., Costco, Target and Amazon compete heavily with Walmart and each other. What other assumption(s) are necessary for the neoclassical "Law of Labor Demand" to hold?
f) Suppose that Walmart has two primary inputs, Labor (L) and Capital (K). Also, it is difficult for Walmart to substitute K (machines) for L (service employees). Draw a set of isoquants consistent with this production function.
g) For your set of isoquants, illustrate what happens to the long-run demand for labor and capital when the exemption threshold is raised (Hint: do not overthink this). Show the scale and substitution effects for both labor and capital. Which effect dominates for capital demand? Are labor and capital gross complements or gross substitutes in your figure?
h) Suppose that labor costs are a sizeable share of Walmart's total costs, but that "supervisor" pay is a very small share of labor costs. Further, the demand for Walmart products is highly inelastic (turns out that most Walmart shoppers neither use Amazon nor go to Costco). Is Walmart's demand curve for supervisors likely to be more or less elastic? Explain.
i) Based on your answer to h), how large do you expect the employment losses to be at Walmart if Trump's DOL allows the exemption threshold to increase as proposed? (After all he ran on improving working conditions for the working and middle classes.)