What Is a Maximum Wage?

FT Contributor  | 

A maximum wage imposes a limit on the amount an individual can earn during a certain period of time. A maximum wage is often contrasted with the idea of a minimum wage, which mandates that low-income individuals earn a minimum amount per hour.

A maximum wage is often implemented to reduce income inequality and to help in times of economic distress. Sometimes also called a wage ceiling, a maximum wage can be implemented at the country level, industry level, or company level. It can also be implemented as a ratio of a fixed sum.

How Does a Maximum Wage Work?

A maximum wage is calculated by capping executive pay based on what the lowest-paid worker at a company makes. For example, Switzerland tried to enforce a 1:12 initiative, where a CEO could make no more in a month than a low-level employee in a year.

A maximum wage can be instituted as either a fixed sum, e.g. $100,000 a year, or as a ratio, e.g. 20 times the wage of a minimum wage worker. As income inequality continues to increase across the world, the idea of a maximum wage is gaining traction in some communities.

What Is the Current U.S. Maximum Wage?

Currently the United States does not enforce a maximum wage. However, they do incorporate scaled taxation, where high-earners are taxed more on income over a certain amount. Cuba is an example of a country that has an active maximum wage law, with income capped at $25 a month for many occupations. Other countries have also proposed or attempted to institute a maximum wage law in a variety of different ways, including Egypt and Great Britain.

Arguments for a Maximum Wage

There are a variety of arguments for implementing a maximum wage, including reducing income inequality, boosting the economy, and incentivizing an increase to the minimum wage.

  • Reduce income inequality — One of the major benefits of a maximum wage is that it reduces income inequality. Because the top earners have a hard ceiling when it comes to how much they can earn, the gap between the rich and the poor is consequently much lower. Since income inequality is such a pressing concern in modern times, advocates of the maximum wage argue that setting a hard limit when it comes to an individual’s earning potential can help to even out discrepancies in wealth.
  • Prevent overfill of applicants to highest-paid jobs — A maximum wage would also reduce the number of applicants to extremely high-wage jobs. This means that skilled, educated workers have more freedom when it comes to choosing careers, and may opt for a career path that has a greater benefit to society.
  • Reduce costs — A maximum wage helps to reduce overall costs for firms by dramatically decreasing the salaries of top earners such as executives and CEOs. Without a maximum wage, these salaries and bonuses can comprise a significant percentage of a company’s expenditure.
  • Boost the economy — Some proponents of a maximum wage argue that an income ceiling would actually boost the economy. Rather than letting wealth collect in the pockets of a few individuals, a maximum wage would more evenly distribute wealth among workers, and result in increased spending and investment.
  • Creates jobs — If there is a cap when it comes to income, companies may also have more money left over to devote to creating new jobs. An extremely high executive salary could be redistributed in order to pay the wages of multiple new positions. In this way, a maximum wage would also help to decrease the unemployment rate and provide well-paying jobs for those who need them.
  • Incentivizes minimum wage increases — If a maximum wage is calculated as a percentage, it can also incentivize minimum wage increases. For top earners to be paid more, a company must also pay their lowest-wage workers more in order for the ratio to stay the same. This can mean that low-wage workers are compensated more fairly for their labor, and that all employees experience an increase in pay rather than just a select few.

Arguments Against a Maximum Wage

There are also several arguments against a maximum wage, including a reduction in government revenue and decreased worker retention.

  • The government doesn’t get revenue — Since a maximum wage limits the income of high earners, the government takes in less revenue in terms of taxes. This could have a negative effect on the government’s budget, and could also reduce funding to beneficial programs such as education, Social Security, and healthcare. Any maximum wage proposal must consider how government revenue will be affected, and ensure that valuable social programs aren’t hardest hit.
  • It may encourage workers to leave — If an individual company or industry institutes a maximum wage policy, it may encourage skilled, educated workers to leave in order to secure more highly paying jobs. This could result in a skill drain, where a company is unable to attract the best talent due to artificially low wages.
  • Workers must have equivalent skills — To be compensated by higher wages, some critics of a maximum wage argue that workers must have equivalent skills. A maximum wage could disrupt this equilibrium, resulting in more skilled workers being paid less and less skilled workers being paid more.
  • The free market could be compromised — A maximum wage also interferes with the free market, which ordinarily sets wages according to the laws of supply and demand. While proponents of a maximum wage may argue that the free market is already biased and inefficient, critics claim that the free market would be unfairly impacted.
  • Firms would have less talented leaders — If a company or industry limits the salaries of high earners, talented leaders may look elsewhere for employment, whether in a different company, industry, or country.

While the idea of a maximum wage is appealing in an age of increased income inequality, in reality there are some concerns when it comes to implementation. Another effective strategy for reducing income inequality might be increasing income taxes to more effectively redistribute wealth.

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