Must We Push Up Costs?

February 3, 1964

In his State of the Union Message, President Johnson made a recommendation that, if adopted, could do immense harm. He proposed “legislation authorizing the creation of a tripartite industry committee to determine on an industry-by-industry basis as to where a higher penalty rate for overtime would increase job openings without unduly increasing “costs, and authorizing the establishment of such higher rates.”

Employers are already compelled by Federal law to pay a premium rate of 50 percent above the regular wage rate for all overtime in excess of 40 hours a week. This legal compulsion of course benefits specific workers under special conditions. But it is doubtful whether even stiffer penalty rates would help the whole body of workers, particularly when we consider them in their role as consumers as well as workers. Compulsory overtime rates increase marginal labor costs of production. In one way or another this increase in costs must reduce both production and employment below what they otherwise would be.

A firm that is subject to stiff competition, especially foreign competition, will not be able to pass on its increased costs in higher prices for its product. It may therefore have to abandon the idea of increased production and overtime employment. If firms in a given industry do not have to fear foreign competition, they may be able to add most of their increased costs to their prices. But with higher prices, sales will fall off, and both output and employment will be reduced.

ABILITY TO COMPETE

Oddly enough, President Johnson, when he is talking about a compulsory 35-hour week instead of a 40-hour week, recognizes this effect. In a paragraph preceding his overtime recommendation, he said: “I believe the enactment of a 35-hour week would sharply increase costs, would invite inflation, would impair our ability to compete and merely share instead of creating employment.”

What bothers Mr. Johnson is that some firms are employing workers overtime, instead of hiring additional workers, in spite of the 50 percent premium rate. He assumes that an even heavier overtime penalty would force the employment of more workers. But would it? It is a striking fact that, in November, when the seasonally adjusted rate of unemployment was 5.9 percent of the working force, 7.2 percent of all hours in manufacturing were overtime hours, paid for at premium rates. This seems to imply that industry could have employed the whole working force at regular hours. Why didn’t it? Since managers always try to keep costs down, and would avoid a 50 percent penalty rate if they could, it seems probable that among the job seekers they did not find enough with the necessary competence or skill to be worth employing at regular rates.

THE NEED OF PROFIT

Whatever the explanation, a still further increase in the legal overtime rate could only make the situation worse by increasing costs. Mr. Johnson’s proposal is even more disturbing from a legal than from an economic point of view. It would be discriminatory as between industries. It would subject each industry to the arbitrary decision of a board on which the government members would cast the deciding vote.

The solution of the problem of unemployment lies in a different direction. As even J.M. Keynes wrote in 1932: “Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”

How long will it take for the world to learn this? How long will it take for us to learn that profits and employment go hand in hand, go up and down together, and that the first is indispensable to the second? Thanks to the initiative of the American Economic Foundation there will be a Hall of Free Enterprise at the coming New York World’s Fair devoted to teaching this lesson. It deserves the support not only of big- and little-business men, but of every worker.