Obama’s middle-class pay raise

President Obama unilaterally raised the pay for millions of Americans this week.  With a proposed minimum wage increase stymied by Republicans in Congress, Obama once again looked to his executive toolkit for ways he could act singlehandedly without legislative action.  And act he did, guaranteeing more workers extra pay for overtime work.

The federal overtime threshold was part of the first minimum wage legislation in 1938.  Before this week, only workers who made up to $23,660 were owed overtime pay by their employees when they work more than forty hours a week.  The threshold has sat at that same level since 2004, slowly eroding from rising costs of living and inflation over the past decade.

Obama more than doubled it.  Beginning in December, salaried workers earning up to $47,476 must be paid time-and-a-half when they work more than 40 hours per week.  The Labor Department estimates that some 4.2 million additional workers will now be eligible for overtime pay, while other researchers predict it could help as many as 13.5 million workers.  The threshold will also now automatically increase every three years, meaning this worker protection will no longer be weakened by long periods of regulatory inaction.

Aside from extending overtime pay to more workers, those earning close to the $47,476 cutoff may also benefit from outright higher salaries.  Employers may give these workers raises in order to avoid the administrative and fiscal costs of recording hours and paying overtime.  In short, it’s a regulatory change that will boost the salaries for some workers while increasing the benefit of overtime work for many others.

It’s also a rule change that could spark economic growth.  One advocate called the change “a minimum wage increase for the middle class.”  And like the minimum wage, raising the overtime threshold could boost consumer demand by giving more workers more disposable income to spend.  As the Center for Equitable Growth explains:

“[I]n an economy that is not operating at full capacity, this policy is likely to put more money into workers’ pockets. A bigger paycheck boosts their ability to buy goods and services—a key economic engine for domestic growth. That is because workers that will benefit from these policies are more likely to spend the extra money they earn.”

This important rule change bolsters Obama’s legacy of turning back the tide of rising inequality.  It also further shifts the country away from the failed trickle-down economics that conservatives have pushed for generations.  In Obama’s view, the economy doesn’t gain from raising the incomes of the wealthy, but rather by making steady progress for the middle class.  When working Americans have more money to spend, everyone prospers.

This was true throughout the three decades of strong, sustained and equitable economic expansion during the mid-twentieth century.  From World War II through the early 1970s, the economy grew at an unprecedented clip and created a broad middle class where families enjoyed rapid and regular gains in their standards of living.

Since that time, broad economic growth in the United States has largely stalled.  Real median household income has stayed virtually flat for decades, as families are working harder for the same pay.  Inequality is growing and costs are mounting, leaving working families hard pressed to keep up.

But the broad prosperity that the economy produced during much of the twentieth century wasn’t just some historical accident.  It was the product of deliberate policy choices utilizing smart economic philosophy.  The Center for Equitable Growth notes that in 1933, President Franklin Roosevelt said:

“I ask that managements give first consideration to the improvement of operating figures by greatly increased sales to be expected from the rising purchasing power of the public. That is good economics and good business. The aim of this whole effort is to restore our rich domestic market by raising its vast consuming capacity.”

FDR understood that the economy thrives off of the purchasing power of working Americans.  Eighty-three years later, President Obama is trying to put that proven method for success back in action.

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