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.

Subject: General Questions    / General General Questions
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 lowlevel 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.

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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.)

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