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Why We Need to Set a Maximum Wage
One of the most troubling aspects of the enormous rise in economic inequality over the last thirty years is that while compensation for almost everyone has been stagnating, compensation at the top has been skyrocketing. In 2017, each of the top 200 US CEOs made between $13.8 and $103.2 million. In most cases, this was 300 times what the median worker took home. In some cases, it was more than 1000 times, up from just 50 in 1970.
There are many more highly qualified people than senior positions
There are many things that need to be done to correct this, but one of them is to limits how much compensation those at the top can earn. My suggestion it to set the initial limit at the amount necessary to enter the top 0.01 percent of the income distribution—around $8.3 million per annum in the US, and then adjust it as necessary.
Why? Because it is not true that the amounts now being paid senior executives simply reflect the market price for their services. Executive compensation is set by taking averages within the industry. Because everyone wants to pay their new hires more than the average, the average keeps ratcheting up. There are many more highly qualified people than senior positions, so if the rules of supply and demand were working as they should, compensation would be going down.
Company performance, in turn, is mostly the result of macroeconomic conditions. This is why corporate executives rarely see their compensation drop when the company does poorly if the market did poorly as well. But this means there is no reason to reward executives lavishly when the company does well simply because market conditions have been favorable.
There is little evidence that the best people receive the highest pay
Most importantly, however, there is no point in paying executives more than necessary to get them to work as hard as they can. Do we really think that a CEO who gets paid $100 million works any harder than one who gets $50 million? $10 million? Once pay is high enough to incentivize maximum effort, extra compensation does nothing.
Nor will imposing a maximum wage cause the “best people” to flee to where they can be paid more There is little evidence that the best people receive the highest pay anyway; many of the highest paid CEOs have run their companies into the ground, and many modestly paid CEOs have turned start-ups into unicorns or turned failing companies around.
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Despite all our efforts, we unfortunately did not find a second legitimate and competent person willing to defend this point of view.
But even Jon Snow finds it bad. If you want to contribute to this debate and defend this position, do not hesitate to contact us at hello@therift.eu!
AGAINST
What is this drivel about a maximum wage?
The idea of a maximum wage is close to a drivel. It’s not your or my money which is being paid to the individual. How can it be our moral right – or duty – to determine how much is being paid? For example, the company belongs to the shareholders, their interests are and should be paramount. The money inside the company is the property of the shareholders. How much they wish to pay the CEO to manage that business is up to them.
To insist upon a maximum wage is to limit only the incomes of the proletariat
Sure, we can try to wriggle out of this point, say that the owners are a dispersed interest who get hoodwinked by the cabal of professional managers. But private equity, which does not suffer from that principal/agent problem, pays more than public companies.
It’s not our money being paid, we don’t get to decide.
Beyond the basic morals there are certain technical difficulties with maximum wages. The people who really make money tend not to make it from wages. The sports or pop star, anyone self employed, by definition doesn’t get wages, their incomes are a mix of capital (human capital but capital all the same) and labour income. To insist upon a maximum wage is to limit only the incomes of the proletariat, those without access to the capital side of the income generation equation. It leaves entirely free the fortunes made purely from capital. A system in which wage income – that of the proletariat and much of the bourgeoisie – is capped and the wealth accumulation of the capitalist, rentier, is not doesn’t really accord with any notion of good sense.
The Laffer Curve really does exist, there’s a tax rate at which people stop going to work any more
Maybe we don’t mean a maximum wage but a maximum income. A 100% tax upon income above whatever level. Sorry folks, the Laffer Curve really does exist, there’s a tax rate at which people stop going to work any more. Our best bet, from Diamond and Saez, is around 54%. Charging a tax rate of near double the Laffer Curve peak isn’t the way to make a prosperous society. Rather, it impoverishes the future.
OK, the people who go into politics, the bureaucracy, they’ve noted that the incomes of people who do something useful for a living have soared above theirs. But the jealousy of the ruling classes really isn’t a good enough reason to have something as horribly stupid as a maximum wage.
The Maximum Wage is an Idea That Should be Forgotten
Back in 2014, the maximum wage briefly entered the public eye as a solution to wealth inequality in the United States.
Thankfully, it quickly left. It’s an idea that shouldn’t be entertained.
A maximum wage stifles competition, incentivizes poor investments, and solidifies the currently wealthy.
Maximum Wages Stifle Competition and Dynamism
High wages compensate employees for risk.
Risk might come from working at a startup or on a risky product launch at an established firm. While bonuses, commissions, and equity are great, salary pays the mortgage.
Who is going to risk a startup when a safe company pays the same?
Maximum wages ensure companies can’t attract highly paid workers from competitors. And when you eliminate employee poaching and high incomes at riskier businesses, you get stagnant industries.
Maximum Wages Encourage Malinvestment
Most maximum wage proposals leave obvious workarounds to a capped salary.
For example, take stock buybacks. With buybacks, public companies purchase their own stock and make remaining shares more valuable.
Executives generally hold more equity than other employees. Effectively, buybacks turn cash held by companies into capital gains – which mainly accrue to the largest shareholders.
Buybacks are certainly appropriate in many situations, but they’re also an effective maximum wage workaround. If capped salaries were common, you’d see even more dubious capital gains shifting schemes.
Maximum Wages Solidify The Currently Rich
Worst of all, a maximum wage locks in the currently wealthy.
Without the promise of future high incomes, the only people in a position to start companies are the already rich. And they’ll only start sure bets… which generate mostly capital gains.
The currently rich already earned a lot of money. If you cap wages, you eliminate the class of people who can diligently save and bootstrap a new company – and challenge today’s rich.
The Maximum Wage is a Bad Idea
Maximum wages are a poor solution to the real problem of wealth inequality.
Instead of making economies more vibrant and competitive, they freeze competition, encourage unproductive investments, and ignore the currently wealthy.
Further, maximum wages aren’t even the best way to provide competitive balance in
sports. A luxury tax increases overall player salaries and provides better balance
than a league salary cap (PDF).
A maximum wage sounds good but wouldn’t deliver. If we really want to address wealth inequality, the best solution is to look to an old – yet proven – one: high taxes.
Apart from the moral position Tim presents (and it is by far the biggest reason) Tim, elsewhere, gives the practical example of Japan.
In Japan they don’t pay their executives very much, either in wages or in options. In Japan being an executive is a high status job and this social status compensates for pay.
Japanese companies under perform compared to those companies that use pay and options to motivate execs.
QED
Reiff kills his own argument. He postulates that we don’t need CEO’s as company performance is driven only by macroeconomic factors. So why bother to pay them anything. Yet they do get paid well in the real world. The observed facts don’t accord with his theory. What he is really arguing is that we SHOULD cap pay because he don’t like it!
Was the cheap potshot at Greta Thunberg, a 16-year old girl with Asperger’s, really necessary Tim?
She has absolutely nothing to do with the subject matter at hand and it’s frankly quite sad to see a supposedly grown man starting off an argument like that. Highly distasteful and uncalled for.
I’m against a maximum wage but your post has done absolutely nothing to reinforce my belief on the matter.
I’m generally known for my rudeness and even foul mouth in my writing. I was being restrained here. And as to this “Greta Thunberg, a 16-year old girl with Asperger’s” OK – so why is anyone taking seriously the idea that we should reform the global economy to match her ignorance of that global economy? If she’s suffering from some affliction that means she can’t be attacked then why are we listening to someone with such an affliction?
Don’t be so precious. It was an amusing comment and a refreshing change from the sycophantic chorus in praise of St Greta.
To answer the question, you would need to know in more detail how the questioner thinks this will work and what they think the alternative is. We could, for example, set a maximum wage at 10 trillion US dollars a second. It has no effect, and therefore no down sides. So taken literally, there is no problem whatsoever with setting a maximum wage. Suppose we set it at five US dollars a day. Big problems! What policy are we talking about?
Do we set a different cap for each job? Is the cap for CEO the same as the cap for a nurse? Does experience count? Age? Qualifications? Inborn skill? Training courses? Track record? Or does everyone, good or bad at their job, have the same cap?
So suppose somebody is currently getting work for $x per day, and we think that’s too much. We outlaw it. Does the person have to carry on working for the lower amount we set? (Slavery.) Or do they get to shut down the company they were running, fire all the staff, and go enjoy their retirement on a Caribbean island somewhere?
Suppose a million people are each willing to pay $5 for a service, but that would exceed the maximum wage. So do the first hundred thousand get the service, and then all the rest have to wait for next year’s quota before they can get the service they want, too?
Suppose you need a life-saving drug, and Joe Genius tells you he’s got one. But he’s already up to his maximum income, so he can’t work any more, so he’s not going to make your drug for you. Do you demand that he work for free? (slavery.) Or do you die, saying that’s a small price to pay for global income equality?
Suppose we require that a corporation not pay more than five times the minimum earned by any of its workers. If we fire all the workers who earn less than one fifth the CEO’s earnings, does that not achieve our objective of equality? Was that what we wanted?
Suppose we impose a cap on UK football players salaries of £40k/year. What do you think would happen to UK football? Suppose we impose a cap on doctors’ salaries of £40k/yr. What would happen to the NHS? Why do you think any other industry works differently?
Suppose a talented doctor could spend 7 years working hard at university to qualify, or laze around doing media studies and earn exactly the same (maximum) salary. Why would they work hard and become a doctor when it makes no difference? Would we not end up with lots more lazy media studies graduates than we need?
What do we think is stopping the market-led solution to this problem? We have lots of unemployed people looking for jobs. Train them up to do these high-salary jobs, and then have them apply to replace the incumbent at whatever salary we think appropriate. Is it that the high-salary jobs are beyond the capabilities of the unemployed? Or are our top business leaders in the business of paying far more than they have to, because they’re so generous and lacking in greed? Perhaps if our business leaders were more greedy, they’d take the opportunity to cut salaries to the bare minimum they could get away with anyway?
Salaries are price signals that guide the optimal allocation of resources to where they’re most needed. Interfere with that, and we wind up misallocating our most valuable and critical resources. How is that good?
It seemed pretty obvious to me that setting a max wage is just plain common sense after reading about the Seattle CEO who slashed his own pay to $70,000 per year in order to increase the minimum wages of his employees to $70,000 per year. Many conservatives predicted the company would die. He now runs one of the most successful and profitable businesses in the entire country.