New Internationalist

Should there be a maximum wage?

September 2011

The cleavage of the hyper-rich away from the rest of society has never been more evident. The disproportionate wealth, resources, power and influence of this small group are under increased public scrutiny. But would an imposed limit on what people earn really help balance society?

Every month we invite two experts to debate, and then invite you to join the conversation online.

Faiza

We need a maximum wage to complement the minimum wage. That is, we need maximum pay ratios within companies and across sectors to put an end to chief executives getting paid more than 250 times what cleaning staff earn. Why? The top three reasons are:

  1. Greater equality: rising wage disparities are one of the key drivers of inequality. By putting a plug on both ends of the pay scale we help ensure decent living standards for all and avoid the negative consequences (eg higher crime, poorer public health) of living in a highly unequal society.
  2. The need to tame executive pay: extremely high levels of pay among executives have encouraged risk-taking behaviour (leading to the banking crisis) and have been found to hinder, not aid, the overall productivity of a company.
  3. Tackle over-consumption and debt: as social beings we constantly rate ourselves relative to others. Keeping up with the Joneses in an era of high inequality has led people to take on higher levels of debt and to over-consume at a level they and the planet cannot sustain.

Beyond the costs to society, academic evidence shows that once people earn an annual wage above $80,000 their wellbeing grows by very little. Thus a maximum wage would help both business and society without damaging the wellbeing of the well-off.

Max

The neoliberal view of inequality – rejoicing in it as evidence of meritocracy – and the view articulated by proponents of The Spirit Level1 – that inequality is the main cause of modern social ills – are both inaccurate and unhelpfully dogmatic.

Runaway gaps between earners can have a negative impact upon social cohesion, behaviour, health and wellbeing. But inequality isn’t simply an evil to be addressed. Whilst it may well be wrong that the Chief Executive of a corporation earns 250 times the wage of their most lowly employee, it is manifestly fair that their most lowly employee should earn substantively more than someone who chooses not to go to work and to rely on welfare instead. Inequality is not always a social evil; sometimes it is a social good, spurring individuals to work, aspire and succeed.

Wage caps are a sledgehammer solution, therefore, to a nuanced issue. We do not want to limit the wealth that may be produced and enjoyed by entrepreneurs, but we do want to encourage business leaders to help reduce the earnings gap.

This is best pursued through social pressure on companies to state and stick to pay-ratios. Transparency in reporting and pressure through state procurement (as has worked well over the Living Wage in London) can get results without resort to simplistic, dogmatic and blunt legislative tools.

Faiza

Rising wage disparities are one of the key drivers of inequality. By putting a plug on both ends of the pay scale we help ensure decent living standards for all and avoid the negative consequences (higher crime, poorer public health) of living in a highly unequal society

The assertion that wage inequality spurs us to work does not uniformly hold true. Of course some deserve greater financial reward than others, but psychological research, such as that by Dan Ariely2 and colleagues, shows that excessive money rewards are actually detrimental to performance. Instead, companies like the Australian IT company, Atlassian, who reward employees by allowing them more autonomy, time to think and be creative and increasing paid leave, have seen productivity and innovation soar. It seems then, with a bit of imagination, there is a way to limit pay and encourage, rather than discourage, the entrepreneurial spirit.

Inequality may not be the root cause of all our social problems, but it does intensify social hierarchies, making it very difficult for those struggling to make ends meet to challenge those earning 250 times what they earn. While social pressure exerted through Living Wage campaigns across the US and London have led to some (mainly public) institutions adopting higher wages for those at the bottom of the pay scale, only a tiny percentage of those on the minimum wage have benefited.

Restricting pay at the top will meet further resistance because, as we all know, when money accumulates, so does power. A maximum wage would go some way to limit the influence of the very rich, enabling a stronger civil society and democracy.

Max

It would be neither fair nor particularly helpful simply to legislate away gaps in income (with the implied harm both to individuals who work very hard indeed and to society as we lose high-achievers) and pretend we had solved society’s problems

Professor Ariely’s work suggests that ‘excessive rewards’ are detrimental to performance, but what counts as ‘excessive’? The way in which bankers were paid – in cash bonuses that failed to reflect the value of their work to their employer – was surely more important to driving bad banking than the money itself? How we pay people can be more significant than how much they get. While we may look at bankers, footballers or CEOs and believe that their pay is excessive, it would be draconian and illiberal for us to insist that our perspective of the ‘proper remuneration’ be imposed – it is not our money, it is the shareholders’.

By insisting upon transparency of pay ratios and executive pay, we can enable and promote shareholder activism and corporate responsibility. It is right and proper that when public money is being spent there is a higher premium on fairness and we ensure no-one has their dignity impaired by employment by the taxpayer. But this shift has also driven change in the private sector and is helping to establish a new norm: Bank of America, Merrill Lynch and L’Oréal are not public-sector employers yet all pay the Living Wage. Over time, the Living Wage applies both moral and market pressure to companies – public pay ratios and political pressure can achieve the same. All without government taking fairly arbitrary and draconian action.

Faiza

Thierry Roge / Reuters
Anti-poverty activists form a human ring around the European Parliament in Brussels last November to call for better wealth distribution in EU countries. Thierry Roge / Reuters

The Living Wage movement further undermines your claim that social pressure is enough to tackle unfair wage structures. A ‘living’ wage should be a given, not a gift, otherwise we are effectively condemning individuals to live in debt and/or have a substandard domestic and social life. How can we ever expect the majority of companies to implement a maximum wage out of choice when the ethical and socio-economic considerations are less obvious than adopting a Living Wage, and the most powerful risk seeing their wages cut?

The accusation that government restrictions impinge on individual freedoms is a common argument used against any push for a fairer distribution of wealth and income. It ignores the fact that individual decisions can incur societal costs. Excessive pay at the top results in greater inequality and over-consumption that has a cost for all in society. Remuneration boards do not calculate the costs of these negative impacts when making decisions about pay, resulting in what economists call a ‘market failure’.

Just as research has shown that a maximum wage need not mean a drop in wellbeing or productivity, it can also be used to demonstrate what is excessive and what is not. Most convincing is the mounting evidence demonstrating the urgent need to address economic inequality. A maximum wage offers us one effective way at least to rein in the wages of the rich.

Max

I believe passionately in balancing the harm of the action against the harm of interventions. Those who wish to legislate for maximum pay rest their case on pay inequality being the most significant factor in the harms they link to it. While income is a factor in societal harms, I cannot accept it is the sole cause of problems such as social incohesion, criminality or health inequalities. Culture, family style and structure, wealth inequality and education are all as, if not more, important. It would be neither fair nor particularly helpful simply to legislate away gaps in income (with the implied harm both to individuals who work very hard indeed and to society as we lose high-achievers) and pretend we had solved society’s problems.

Conservatives look to social and political pressure as a resolution not because we are weak on the issue of income inequality but because we are strong. We know that reduced gaps will bring bounty to companies which enforce them, and we know that society is capable of exerting pressure and getting results (not just on the Living Wage but also on fair trade and on international human rights issues). We know that change must be incremental for it to be fair – that pulling the rug out from beneath our highest achievers may reduce inequality but will also reduce growth and exile many who contribute highly to our economies. Yes, fight for greater pay equality. But do so with a view to society’s complexity rather than an evangelical assumption that a change in the law will beckon utopia.

Faiza Shaheen is a Senior Researcher on Economic Inequality at the new economics foundation.

Max Wind-Cowie is the Head of the Progressive Conservatism Project at the think-tank Demos and the author of Everyday Equality.

  1. 2009 bestseller by Richard Wilkinson and Kate Pickett which makes the case for greater equality as a social good.
  2. Professor of psychology and behavioural economics, who has researched perceptions of ‘ideal wealth distribution’.

Front cover of New Internationalist magazine, issue 446 This feature was published in the September 2011 issue of New Internationalist. To read more, buy this issue or subscribe.

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  1. #1 Peter Hardy 22 Sep 11

    Like Plato's view, the political class should have especially limited pay levels so as not to distance them from the lives of the people who they govern and to make them less self-centred and liable to bribery.

    Large corporations are always justifying their pay by claiming that they need ever higher wages to attract people with the right skills for the job. Let's analyse this claim: 1)if pay were limited to the highest rate going, people couldn't refuse the job because of a higher offer elsewhere; 2) there's no reason to doubt that there would still be a great many skilled people who were willing to work for that wage, even if there were a few very rich people who couldn't be bothered for reasons other than higher pay elsewhere; 3) a maximum wage is clearly a far more efficient use of money for society.

    No one can possibly justify earning more than half a million per anum. I think if it was to be practically achieved (and I do think it is a priority) we should start by campaigning to cap at £2 million and lower it from there.

  2. #2 oliver amoros 23 Sep 11

    Max - ’While income is a factor in societal harms, I cannot accept it is the sole cause of problems such as social incohesion, criminality or health inequalities. Culture, family style and structure, wealth inequality and education are all as, if not more, important.’

    This is an obtuse point. Max fails to acknowledge that culture, family, education etc are all EFFECTS of inequality. Greater equality would be the CAUSE of a shift in culture toward better education, community cohesion, and an enlightenment of values.

  3. #3 Franca De Angelis 27 Sep 11

    The gap between the top earners and the average earners is obscene and has nothing but a negative impact on everybody's life. However, I'm hesitant toward instituting a maximum wage, as I think the problem can be addressed by other means:

    1) Corporation staff that makes corporate decisions should not be allowed to hold company stocks;

    2) There should be a limit as to the amount of salary for an individual that the corporation can claim as an expense, and that should include percs.

    3) Income tax should be graduated more steeply and with greater gradation, e.g.; 50% over $100,000, 75% over $200,000; 90% over $300,000; and 95% over $400,000.

    I think the suggestions above are easier to achieve, and there may be other similar ones. However, the most important thing is for each and everyone of us to become aware of what's involved in this gap and change our attitude toward wealthy people so that we don't only not admire them but see them in a negative light.

  4. #4 cliffjones 28 Sep 11

    Of course there should be a maximum wage. Nobody needs more than £100,000 ($160,000) a year, so we might start at that level - though, to be honest, if we were talking about 'need' rather than 'want' we'd be setting the bar a great deal lower still. The current position, where some people earn more in a week than others earn in 10 years, is socially corrosive and fundamentally toxic. Rein in the differential between maximum and minimum and we might at least feel we are travelling in the same boat - instead the elite sailing off into the sunset in their yachts while those at the bottom sink or swim.

  5. #5 Garth 28 Sep 11

    Oliver Amoros writes ’Max fails to acknowledge that culture, family, education etc are all EFFECTS of inequality. Greater equality would be the CAUSE of a shift in culture toward better education, community cohesion, and an enlightenment of values.’

    But Max's point was precisely that claims that inequality causes all these issues are unfounded - I'd like to see good evidence for them (better than that in the Spirit Level).

  6. #6 Brad 28 Sep 11

    @Oliver Amoros
    Yes, in fact most of what Max says is obtuse.
    What I would like to know is how much Max earns from obfuscation and peddling the status quo?
    Can anyone tell us?

  7. #7 Maggie Springer 03 Oct 11

    Yes, there should be a maximum wage. If work is meaningful and needed by one's society, excessively high monetary rewards (in excess of, say, $100,000 a year) shouldn't be necessary as an ’incentive.’ I would even go so far as limiting an individual's income $50,000 a year, assuming that the society is providing ample social services, including free (tax-supported) health care. Even that might be too high in an ideal society. Why should there be a vast difference not only in income and wealth, but in the housing, nutrition, education, health care, etc. available to people? People who don't want to (or can't) work at all (at regular jobs) should have a guaranteed minimum income and social services.

  8. #8 ciderpunx 04 Oct 11

    A maximum wage seems a reasonable enough proposal, but we need to think about the bigger problem, which is our broken political/economic system. Even with a maximum wage we'd still have an unjust distribution of property and power.

    A maximum wage would, I fear, fail as a political project if carried out in isolation, even if somehow the high wage earners somehow didn't use their power, influence and enormous wealth to derail its implementation. If some people own more property than others its possible to substitute a wage for a redistribution of property, perhaps we'd introduce a ’maximum amount of property owned rule’. Power over others can also be used as a proxy for a wage, so we'd want much more democratic and less hierarchical power distribution. Corporations as structures are designed to maximize profit, whatever the workers in them are paid. So we'd need to abolish corporations. And obviously we have to do this on a global scale to avoid the rich moving themselves or their capital elsewhere.

    By the time we've done all that what remains ain't looking a lot like capitalism as we know it! If we're serious about getting a just economic system we need to be considering more than salaries.

  9. #9 Gurukarm Khalsa 04 Oct 11

    I found this comment, in Max's first argument, quit interesting: ’...most lowly employee should earn substantively more than someone who chooses not to go to work and to rely on welfare instead.’ in many US states the gap between not working and receiving assistance, and working for minimum wage, is narrow indeed.

    Also, many of the super rich are not making their incomes from ’wages’ at all, but rather from bonuses, investments, and capital gains. How does that factor in, here?

  10. #10 carol 17 Oct 11

    definately think that there should be a cap on earnings. Personally don't think anyone is worth what the very wealthy earn or receive as for example the royal family whom let's face it get a lot for not much input! just the luck of theur birth. Also think that monetary bonuses are not always the correct incentive but just bourne through the capitalist take on how we should live our lives..there is more than one way to see the world not always through the economy and capitalism!

  11. #11 T 06 Feb 12

    My belief is that we need establish a curving tax wall to enforce a max wage. We shouldn't stop someone from making 2 bil but they'll only walk away with 1 mil after taxes. A curving tax wall would reduce the amount of taxes on lower incomes but greatly increase the taxes. Also we clearly not give any tax returns and set them up to establish a retirement. More you make the better the retirement with diminishing returns of course! You could even use that fund a strong and better health care system for all. From there we should give businesses tax incentives to higher more full time employees that meet the hourly limit. This would reduce the amount of 2nd-3rd jobs required by others and the country would still collect its money through employees rather than the company. A little bit better equality for everyone. :) With out limiting anyones freedoms.

  12. #12 T 06 Feb 12

    WOW did I really right higher! I meant Hirer... WOOT Dyslexic!! AND TYPING IN A HURRY NOT A COOL MIX!

  13. #13 louis 10 Feb 12

    I strongly believe in what T wrote.

    There should be a limit that is imposed by tax. I'm in no position to say what the ’maximum’ possible amount after tax should be, but I honestly don't think there is a single job in the world that can represent 250:1 in terms of tasks, time, responsibility and actual work.

    As Faiza mentioned, at a certain point, that money serves as power and not as what money is intended to be.

    Again this is strictly my opinion, as I do not hold any degree or field experience to provide any definition or proper proof.

  14. #14 EveryCoinHas2Sides 28 Sep 12

    Wow, an interesting debate. I agree with both Faiza and Max but with reservations. Faiza states: ’The assertion that wage inequality spurs us to work does not uniformly hold true. Of course some deserve greater financial reward than others’ - these sentences (without the inclusion of 'excessive' before wage in the 1st sentence)seem to be in conflict rather than complementary...though I agree with the point I think is being made. I agree with Max that wage disparities are needed to drive people to work harder, and I agree where he says that it is the shareholders' money but I disagree with him on some details. It is no more 'draconian' to cap wages (it can be set at any level, so the incentive is still there) than it is to tax people the way we do in the first place, or to set a minimum wage the way we do. The important thing is the gap - a decent wage would be one where people can enjoy whatever executive luxury they fancy, but NOT at the expense of, or at the same time as, others dying for lack of a decent living standard. Lazy people should not be rewarded, I agree, but many of the hardest working people are poor, and many high-earners (hedge-fund managers who risk none of their own money etc.) don't work hard at all in comparison. Besides, shareholders (especially middle earning individuals) have little or no say when up against the huge MNC 'shareholders'. Excessive executive pay is a done deal - the average shareholding individual has, in effect, no say whatsoever. The living wage, and minimum wage may make some people feel good about continuing with excessive pay disparities, but in practice they do nothing whatsoever without a 100% tax because it is RELATIVE!! One mil minimum wage would be useless if a coffee cost 2 mil! Furthermore a $1 minimum wage would be more than acceptable - indeed it would be better than the present situation - IF the max wage were $2. It is RELATIVE!!! It isn't for me to suggest what the max should be, but it is clear that there should be a max... and then we can start to think of a minimum.
    I too believe passionately in the ideals of reward, hard-work, the free-market and so on - but I personally could not live with my wealth if it meant stepping on others, ignoring billions of people without food water and electricity, and allowing people to die just so I can keep what's mine, what I've 'earnt'. If pop stars, film actors and TV personalities have earnt their collective billions, regardless of the lack of scarcity of their generic product then I'm Peter Pan and my father was Harry Potter!

  15. #15 Alexis 02 Dec 12

    I agree with both Faiza and Max, each had valid points to their arguments. I would most likely lean towards Max's argument specifically because he stated that it allowed people to strive for higher positions and more successful lives which I think it does as well. Although, I agree with Max, Faiza had a good argument because she looks at the bigger view on things, she talks about the way it affects everyone. Faiza talked about inequality which is so relevant in today's society. Also, Faiza spoke about the difference in salary between the highest and lowest incomes (a chief executives make 250x more than the lowest employee). Overall, both had good arguments but I would lean more towards Max's argument.

  16. #16 Miss Me 07 Dec 12

    I do not see how anyone no matter how pure the intent, can say/think they have the right to tell another person how much (or how little) they can/should earn.

    Rich people become rich by either working hard & being smart or their Grandfather or Great-Grandfather worked hard & was smart.

    Unwealthy ’poor’ people are not ’well off’ because they have a ’Give me’ mentality & want the government to give them everything they want. Okay, yes I know not everyone who is poor is a leach on society, some people can't work. But people who are perfectly capable of working yet don't, should not be given money taken from those who earned it.

    Please keep in mind this is my own opinion as I do not have a degree in this topic, I just don't see how people can think they can take from the Productive & give to the Lazy & then think they've solved all the injustice in the world, when in actuality, they just created a greater one then existed previously.

  17. #17 jeannie 21 Jun 13

    I have grown up in homeless shelters and trailers my entire life, I have been in the navy and now I am in college... I'm only 23, but I still feel like I will never have the life I want and deserve because deep down I know that someone somewhere is getting paid for little to no work... why should I have to work 40+ hours a week at a job to make 250% less money than someone who works 10- hours.. I honesty look at rich people with disgust, They literally piss me off just by walking into the room... it isn't fair how much money some people make at all and it makes people like me that come from next to nothing... want to give up. Whats the point in trying to work my butt off if my actions are barely going to give me a living wage, while the rich sit on thier butts and reap the benefits?

  18. #18 Tommy 17 Jan 14

    There is no reason why actors, athletes, CEO's and the like should be paid more than the President of the United States. There should be a maximum of $400,000/year--exactly what the President earns. Make over that, and you pay 100% tax on the excess.

  19. #19 Charles 30 Jun 14

    People like Max should go back to uni, learn how to build a functional argument and try again then. While he's there he might want to read a few more books and studies that actually deal with inequality...As he even seen any form of correlation ever? Yes of course inequality is socially corrosive and a maximum wage combined with other ways of rewarding good work by other means than giving more money could great transform our society for the better.
    It's so clear in my mind and in other people's minds that Max's own confusion and conservative positions are glowing. He simply wants nothing to change. It's as simple as that. And since he can't really refute anything that was said by Faiza, he's just saying non sense.
    That type of mindset reminds me of basic cognitive biases that are damn frustrating to work through with these type of people.

  20. #21 byzance 25 Sep 16

    misconception of economy
    economy comes from the Greek and being economical means being reasonable and inexpensive. but reason is hard to find in the world. a global minimum with global maximum wage would be optimum to fight any financial crisis problems and avoid too great disparities which are the main reason for the global crisis. competition is only exploiting, I do not remember gaining anything as a consumer from western companies moving cheaper production to the east, nor did lowest oil prices decrease any costs. competition can still be achieved through innovation for example. so bring your house in order = economy.

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This article was originally published in issue 445

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