Monday, 28 July 2014

If minimum wages, why not maximum wages?

I was in a gathering of academics the other day, and we were discussing minimum wages. The debate moved on to increasing inequality, and the difficulty of doing anything about it. I said why not have a maximum wage? To say that the idea was greeted with incredulity would be an understatement. So you want to bring back price controls was once response. How could you possibly decide on what a maximum wage should be was another.

So why the asymmetry? Why is the idea of setting a maximum wage considered outlandish among economists?

The problem is clear enough. All the evidence, in the US and UK, points to the income of the top 1% rising much faster than the average. Although the share of income going to the top 1% in the UK fell sharply in 2010, the more up to date evidence from the US suggests this may be a temporary blip caused by the recession. The latest report from the High Pay Centre in the UK says:



“Typical annual pay for a FTSE 100 CEO has risen from around £100-£200,000 in the early 1980s to just over £1 million at the turn of the 21st century to £4.3 million in 2012. This represented a leap from around 20 times the pay of the average UK worker in the 1980s to 60 times in 1998, to 160 times in 2012 (the most recent year for which full figures are available).”

I find the attempts of some economists and journalists to divert attention away from this problem very revealing. The most common tactic is to talk about some other measure of inequality, whereas what is really extraordinary and what worries many people is the rise in incomes at the very top. The suggestion that we should not worry about national inequality because global inequality has fallen is even more bizarre

What lies behind this huge increase in inequality at the top? The problem with the argument that it just represents higher productivity of CEOs and the like is that this increase in inequality is much more noticeable in the UK and US than in other countries, yet there is no evidence that CEOs in UK and US based firms have been substantially outperforming their overseas rivals. I discussed in this post a paper by Piketty, Saez and Stantcheva which set out a bargaining model, where the CEO can put more or less effort into exploiting their monopoly power within a company. According to this model, CEOs in the UK and US have since 1980 been putting more bargaining effort than their overseas counterparts. Why? According to Piketty et al, one answer may be that top tax rates fell in the 1980s in both countries, making the returns to effort much greater.

If you believe this particular story, then one solution is to put top tax rates back up again. Even if you do not buy this story, the suspicion must be that this increase in inequality represents some form of market failure. Even David Cameron agrees. The solution the UK government has tried is to give more power to the shareholders of the firm. The High Pay Centre notes that: “Thus far, shareholders have not used their new powers to vote down executive pay proposals at a single FTSE 100 company.”, although as the FT report shareholder ‘revolts’ are becoming more common. My colleague Brian Bell and John Van Reenen do note in a recent study “that firms with a large institutional investor base provide a symmetric pay-performance schedule while those with weak institutional ownership protect pay on the downside.” However they also note that “a specific group of workers that account for the majority of the gains at the top over the last decade [are] financial sector workers .. [and] .. the financial crisis and Great Recession have left bankers largely unaffected.”

So increasing shareholder power may only have a small effect on the problem. So why not consider a maximum wage? One possibility is to cap top pay as some multiple of the lowest paid, as a recent Swiss referendum proposed. That referendum was quite draconian, suggesting a multiple of 12, yet it received a large measure of popular support (35% in favour, 65% against). The Swiss did vote to ban ‘golden hellos and goodbyes’. One neat idea is to link the maximum wage to the minimum wage, which would give CEOs an incentive to argue for higher minimum wages! Note that these proposals would have no disincentive effect on the self-employed entrepreneur. 

If economists have examined these various possibilities, I have missed it. One possible reason why many economists seem to baulk at this idea is that it reminds them too much of the ‘bad old days’ of incomes policies and attempts by governments to fix ‘fair wages’. But this is an overreaction, as a maximum wage would just be the counterpart to the minimum wage. I would be interested in any other thoughts about why the idea of a maximum wage seems not to be part of economists’ Overton window

46 comments:

  1. Good article but please remember to give Chris Dillow his Overton hobby horse back.

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  2. Would it be unfair to ask how much these economists were themselves paid? And would it be unfair to ask: if the purpose of economics was to defend the interests of the rich, what would it do differently?

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    1. Not unfair at all, but in the UK I suspect only a tiny fraction of academics working in economics departments earn over the £140,000 needed to get in the top 1%. Maybe a few more in the top business schools because of consultancy income, but again not many. No idea about the US.

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  3. So why the asymmetry?

    Because you are thinking like an economist, and have misunderstood the justification for the minimum wage.

    Price fixing, save in a monopoly situation, is just daft. If we know one thing about economics it is that. It is a policy that has been tested to destruction in lots of times and places with lots of different things. You know this better than me.

    Why then have a minimum wage, which is a form of price fixing?

    Because the best justification is nothing to do with economic outcomes but human dignity. There is a base level below which we think it is unacceptable to pay people for work in a civilized society. Quite right too. We pay a (very small) economic price overall for this political judgement.

    At the other end no equivalent problem arises. Nothing undignified about being paid $10,000 an hour, quite the reverse.

    So deal with inequality through the orthodox method: the tax and benefit system. As your own graph shows, in the UK inequality hasn't really budged in over 20 years anyway.

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    1. I fail to see the difference. If you deal with in equality by instituting very high marginal tax rates on income, that is just a wage control by other means.

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    2. Interesting discussion. I think it's true that government efforts of the past to deal with this problem have failed. That doesn't mean the idea doesn't have merit. It seems to me it's a matter of changing the focus of consumers. Suppose disclosure of the gap between the minimum and maximum salaries in any publicly traded company was required and then it would be up to the consumers and shareholders to choose to invest in companies where that gap was shown to be lower. All forms of compensation would have to be included in the disclosure and the formula for determining the gap would need to be standard for all but if this were done most people would invest in companies with the lower gap because it is a sign of a healthier company with a greater chance of sustaining profits in the long term.

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    3. "Because the best justification is nothing to do with economic outcomes but human dignity. There is a base level below which we think it is unacceptable to pay people for work in a civilized society."
      That claim only manages to go half way. A "dignity problem" can be unpacked in terms of a material distribution that causes a demeaning social status for some, because such a distribution triggers social inegalitarian feelings and attitudes of shame, demeaning and disgust. Being absolute badly off is such a trigger. But being relatively very badly off vs well of is also such a trigger. As long as the 1% soares sky high above the rest of us, that problem will remain. Your argument for minimum wage therefore can be used to also argue for a maximum wage, or some other policy for inequality decrease.

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    4. I will repeat it once more, but the ambition of economics is to break down social interactions to a set of decisions enacted by individual agents. There is nothing inherently wrong in price setting; it becomes wrong only when it fosters wrong decisions.

      And whether this is always the case is not at all obvious.

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  4. A good idea worthy of further exploration. However, you would need to plug a loophole whereby corporate employees could convert themselves into self-employed entrepreneurs. e.g. Mr Big is dissatisfied with a maximum £1m a year salary so he sets himself up as Mr Big private equity partnership or sole trader and his firm charges £5m a year for a contract to do what he was doing previously.

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    1. This is possibe, however it would be possible (I think?) to state that Directors had to be employees. This would therefore constrain Director's wages, which could potentially act as a brake on contractor's wages, as most Directors would not wish a contractor to earn more than them (these big salaries are just ego after all, they don't need this money, they just want more peanuts than the next bloke).

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  5. Surely there is an important ethical distinction between a minimum and a maximum wage. A minimum wage justifiable because it acts as a safe guard to ensure that labourers are not over exploited and are able to achieve a basic subsistence from their labour at the very least. There is, quite obviously, no equivalent problem of living standards at the other end of the spectrum.
    It is clear that the sate has a role in advocating for the weak against the strong, however I am much less convinced as to if it has any right to curtail the living standards of the any group (even if they are already very well off and even if it will produce some other perceived social benefit.)
    I am not an economist, but surely if there is a market failure with UK and US CEO's being paid vastly more than they are worth, as companies become more global wont they have to bring their salaries in line with new overseas competitors (or raise their own value so as to be able to justify their large pay packet.) In other words, is it not possible that the market will relieve the scale of income inequality?

    Thom

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    1. http://www.vox.com/2014/7/23/5927165/chart-the-weak-relationship-between-ceo-pay-and-performance?utm_medium=social&utm_source=facebook&utm_campaign=ezraklein&utm_content=sunday

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  6. Chapter 11 of Shiller's New Financial Order (2003) suggests using the after-tax Lorenz curve so having the government fix the Gini-coefficient.

    This would stop the 1% cum 0.1% cum 0.01% creaming off money at source when there is no economic rationale that they rather than their staff or externalities in the UK helped earn it for them.

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  7. To reply to SpinningHugo's comment, if we have a NMW for reasons of human dignity, it doesn't seem much of a stretch to say that we should have a maximum wage to reflect that no-one's labour is worth >X times another. Why is the NMW ok as a distributive tool - when taxes and benefits could also do that job (without asking employers of the low paid to take all the burden) - but a maximum wage wouldn't be?


    On the economic side, a minimum wage could be thought of as protecting employees from abuses of market power. That is, we might assume that there's a floor to human productivity and if employers are paying below the minimum wage then that's often because their employees have no other options, rather than because that's a fair wage for what they do.

    At the top, we could similarly assume that few people are really worth that much to their company, and that their pay is likely a result of poor information, cronyism etc. rather than incredible productivity. A maximum wage would therefore be a blunt way of tackling a market failure and economic rent, just like the minimum wage. The assumption of market failure actually seems more likely at the top than at the bottom with the minimum wage. That said, if it's the entire company or industry that's extracting economic rent, rather than just executives, a maximum wage is no solution.


    Presumably a maximum wage would need to include payment in shares, as well as account for self-employment (which is already tax advantaged). I don't think the line between high-paid employee and "self-employed entrepreneur" is as clear as this blog suggests.

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    1. "If we have a NMW for reasons of human dignity, it doesn't seem much of a stretch to say that we should have a maximum wage to reflect that no-one's labour is worth >X times another. Why is the NMW ok as a distributive tool - when taxes and benefits could also do that job (without asking employers of the low paid to take all the burden) - but a maximum wage wouldn't be?"

      The point is: it isn't a distributive tool. Yes it has distributive effects, but it is a mistake to take those as being its justification. If it were all about distribution, the benefits system would be a better option, as it is better if the burden of dealing with poverty falls on the entire tax base, rather than on individual employers.

      It is about whether the *individual* is being treated in the way that human dignity requires.

      I promise you, if you paid me $10,000 per hour my dignity would not suffer one bit.

      Nor does my personal dignity suffer if the CEO of Tescos gets paid £2m (or whatever).

      Not everything is about distribution, as economists tend to think.

      Market failures in some areas of corporate governance seems to me to be a quite separate issue from whether we should have a maximum wage. I can see a much stronger case for limiting CEO pay specifically than for a maximum wage generally.

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  8. SW-L; "If minimum wages then why not maximum wages?"

    Because while those who benefit inordinately from the economic activity of our society are happy to throw a populist bone under the table (as it costs them very little anyway) they will not allow any restraints on their abilities to extract rents for themselves.

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  9. When it comes to inequality, progressive taxation seems to make more sense than a maximum income. If only because we could use the revenue.

    However, economically I could imagine that a maximum income makes sense. Within the firm there is no market, thus the salaries cannot be justified by saying that the markets will solve the problem. Only the full firm is exposed to competition. The salary of the CEOs is only a small part of the total costs of production and there is thus hardly any incentive to keep it down.

    Within the firm, large inequality may well have negative effects. People like fairness and large inequalities may make collaboration more difficult and disincentives people from working hard for the common cause.

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  10. Interesting idea, and some thoughtful comments.

    Would it be helpful to use one of the phenomena often cited by advocates of high executive salaries: "No one complains about astronomical salaries for sports players/pop stars"?

    It is much easier to identify the added value of an entertainment star than that of the CEO of a large business. Wayne Rooney* may or may not be worth £300,000 per week to his team but if he isn't it will quickly become apparent if only because there will be semi-objective tests when he is unable to play and is replaced by someone earning half or less that amount. On the other hand, unless the firm goes under a star CEO will only be replaced by someone earning as much, or more than, him (just possibly her).

    It would be interesting to apply the footballer test and 'rest' a top business star for a few months to see how the lower-paid underlings manage in his/her absence. However, the CEO has both the incentive, and crucially the power, to ensure the experiment does not happen.

    Which brings us to the points already made: the star footballer, overpaid as he might be in many people's eyes, does not fix his own salary, and does not appoint the people who do. The CEO, on the other hand, to a very large extent does either or both of these things. There is a very serious failure of governance which will eventually come to an end (because all trends do) but whether it will be through a return to the 'egalitarian' 50s and 60s, through violent revolution (not impossible, especially if military commanders find they have more in common with their troops than with the property owners they are protecting) or through some other collapse remains to be seen.

    * A well known English football (soccer) player

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    1. Interestingly, English footballers were subject to a £20 maximum wage until the 1960s, when Jimmy Hill fought to scrap it as head of the players' union. Five years later England won the World Cup.

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  11. I think deregulation in the labour market must have had some effect on worker's wages, in addition to other factors(such as technological change, globalisation - production moving to China, intense competition from inward labour flows from the A8) .

    But I suspect the ridiculous W>MP problem with CEOs and bankers must have been linked to financial deregulation. I think Neo - Marxian, Post Keynesian, Joan Robinson/ Monopolistic Competition types of theory here clearly trump neoliberal theory. Deregulation does not always lead to win win outcomes. Rather it can lead to concentrations of capital and wealth.

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  12. «Note that these proposals would have no disincentive effect on the self-employed entrepreneur. »

    Is is fascinating for me that our blogger and the previous commenters are discussing this proposal as if top-paid persons working for today's companies were still employees of those companies, or as if the bulk of their compensation were paid to them as wages/salaries.

    Common top-paid "wealth creator" compensation arrangements, also as reported by the press, often have these features:

    * Big companies or government agencies purchase "management services" from small foreign companies registered in low-tax, high-confidentiality countries. The "management services" contract may specify that the services will be provided by a certain person, who may or may not be an employee or a shareholder of the small foreign company, who may be just some kind of helpful "third party"; often the only point of contact the "management services" supplier gives is a nominee's postbox in some country like Bahrain or Singapore.

    * Some part of the compensation for "management services" may actually be paid directly to the person mentioned in the contract, for example typically the tax-free pension contributions.

    * Some part of the compensation may be paid to the small foreign supplier of "management services" by the "official" purchaser of such services, duly invoiced and paid via official channels.

    * A much larger amount may end up in the foreign accounts of the foreign company contractor via payments or "arms length" :-) deals from the foreign account of a foreign subsidiary of the purchaser of "management services", in a way totally invisible to the tax authorities of the country where the purchaser of management services is located, or where the person named in the "management services" contract is resident (which may be a tax-friendly country like Monaco or the UK anyhow).

    In other words any "maximum wage" rule would be unlikely to apply to many top-paid workers of companies or government agencies, because unless they are really stupid they are not employees of the companies they manage, and get most of their money as transfers between foreign accounts belonging to nominee companies whose beneficial ownership is a "mystery".

    BTW a similar approach on a much smaller scale is often used the other way round, to turn low-paid workers into independent contractors, which are then not subject to costly minimum wage, pension, paid holiday, health and safety, maximum hours, rules.

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    1. BTW these kind of "arrangements" are also common in the USA for famous academic economists, who apparently get a small fraction of their income as salaries from their universities, and the vast majority as "self-employed entrepreneur"s thanks to incentives paid to them in similar schemes by grateful corporate sponsors.

      http://www.zerohedge.com/news/2012-11-03/charles-ferguson-standing-behind-every-great-con-artist-someone-glenn-hubbard
      «Well, actually, now that Columbia had adopted disclosure regulations, we now know at least something about Hubbard's income sources, and the overwhelming majority of them are in the financial sector. The HTML version his CV (which you can read here) does not fully disclose his activities, but if you click on the PDF version, you see more. And what you see is that at least two thirds of his literally dozens of consulting, advisory, and directorship arrangements over the last decade are with the financial sector -- MetLife, KKR, Goldman Sachs, Freddie Mac, JPMorgan Chase, Citigroup, the list goes on and on.»

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  13. The low argument would be the best and brightest would emigrate. The high argument would be they will domicile their corporations in tax havens.

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    1. We seem to have slipped from a discussion of bankers and company directors to a discussion of the best and brightest. How did that happen?

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  14. I'm equally against maximum and minimum wage, they're both heavily distortionary, taxes and subsidies/transfers are much better to achieve a more progressive income distribution

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    1. If a portion of a person's income is taxed away in a manner that is completely transparent and predictable in advance, then from the standpoint of economic incentives the effect is the same as if they never received the income at all. So I really don't see the difference. Markets aren't unimpeachable geniuses. Sometimes they deliver lousy outcomes, and so "distorting" their present function by changing the rules under which they presently operate can be useful.

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  15. Why have executives’ pay gone so out of kilter? I think the problem stems from two mistaken ideas: that companies exist for the maximisation of shareholders’ (as contrasted with stakeholders’) wealth and that the way to achieve that is to align managers’ interests with those of shareholders'.

    I recall that in 2012, when the shock of the financial crisis was still keenly felt, British Prime Minister David Cameron vowed that his government would crack down on excessive executive pays. I was particularly impressed when he declared that he would see to it that pensioners, employees, creditors, i.e. not just shareholders, have their say in the fortunes of a company. Alas, the eventual actual act didn’t quite live up to those brave words. So, now shareholders get to vote on executives’ pay, but what happened to the say of other stakeholders?

    Well, some people might say that giving shareholders a say in executives’ pay seems to be a step in the right direction. But it also is like a half jump to cross a chasm. It reinforces the ideas that executives’ interests are tied solely to that of shareholders; and that the interests of other stakeholders do not come into the equation. But these were the very ideas that got us into trouble. They led executives to over-focus on their companies’ share performance rather than on their products’ performance. And they led executives to over leverage their companies, to extract that last ounce of return on equity.

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    1. The class of people consisting of highly compensated CEO, on the one hand, and corporate shareholders who own enough shares to wield significant decision-making power, on the other hand, are at the end of the day a very small class of people. And most of them know one another and have a mutual appreciation of their common interests. Powerful shareholders pursue their interests by appointing CEOs who are determined to reward shareholders to the maximum extent possible, and those CEOs pursue their interests by delivering those prmised rewards.

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  16. Rather than a maximum wage, why not set a maximum compensation amount which is tax deducible from revenue?Any compensation above that ceiling would be included in revenue and subject to corporate tax.

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  17. The rise in stock option compensation in the US is believed to be tied to Congress restricting the deductibility of high salaries. Stock-based compensation is probably the reason pay packages have become so large. "Unintended consequences."

    One small problem with the maximum wage is that it would probably need to depend on the firm. If the maximum wage was set at a "reasonable" value, you could have most of the front office employees of a good hedge fund running into it. But if the law is flexible, it will be arbitraged.

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  18. A thought provoking post. Both concepts are wrong for many of the same reasons IMHO.

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  19. Instead of setting a national maximum wage, why not link the MEDIAN wage within a corporate group to the maximum wage being paid?

    If the company is so profitable that the people at the top can pay themselves £500/hr each, then the MEDIAN wage should be no less than X% of that per hour. Say 3.33%, (i.e. 30x, as opposed to the Swiss 12x) down to a national minimum limit, the minimum wage.

    A national maximum wage would be never be implemented, if only because out football league would be decimated! And, it would be easy for management to devise ways around a link between maximum and minimum wages, just outsource jobs. But not so easy to avoid a link to median wages.

    This is the common sense test shareholders operate in our company to judge whether directors are over paying themselves relative to performance of previous directors (who tend to be long term shareholders) or to other current staff.

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  20. Instead of government setting a maximum wage, simply create a disincentive for executives to accept enormous compensation packages.

    Simply remove corporate immunity for employees who earn more than $5 million per year in total compensation. Allow them to be sued PERSONALLY by individuals who have been harmed by the actions of the corporation they are running and allow shareholders to sue them to "claw back" their compensation to reimburse the corporation for fines that are assessed while they are in charge.

    Conservatives LOVE to talk about "personal responsibility". So why shouldn't an executive who earns $13,700 per day ($16,500 per day if they take Sundays off) be held responsible for the actions of employees under them? If they don't like the responsibility, they can take a job with lower pay.

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    1. Indeed! How does a compensation package that has "all the upside but no downside" square with a day's work for a day's wages?

      Soon, UK's Banking Reform Act Section 36 will fundamentally change all that. All along, during the debates over the Vickers Report, I had thought that the law would not go so far as to criminalise any mismanagement of banks but now that has come to pass. Now senior managers may be prosecuted for any decisions that they make (or fail to make) that lead to the failure of their banks.

      I wonder how this new law will sit with the legal doctrine of Business Judgment Rule. For many decades courts had been too wedded to this legal theory of business judgment, which said that the courts would not question the decision of a director. But it looks like the times they are a-changing. For example, the Californian court ruling in FDIC v Scott Van Dellen, et al, in which former officers of IndyMac were found negligent and in breach of their fiduciary duties to the bank, was an early sign that the business judgment defence is no longer impregnable after all. And in the case FDIC v former IndyMac CEO, Perry, the court ruled that the Business Judgment Rule was applicable only to directors but did not shield corporate officers. Therefore Perry as a corporate officer was not shielded by the Business Judgment Rule, even though Perry as a director might have been.

      Well now, with Section 36 of the Banking Reform Act, English Law has gone a step further by criminalizing decisions that fall far below what could reasonably be expected of senior managers.

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  21. There is an economist in Ecuador who has set the maximum wage at 25 times the minimum, at least in government. He (the president) did not try legislate maximum private sector wages. He just set his own wage to 25 times the minimum, and other government ministers at less then the president. In order to get a raise himself, he needs to raise the minimum wage.

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    1. In the Netherlands we have a law called the "Balkenende standard" (named after the previous prime minister), which says in effect "Nobody in a (semi) public function (ie who is paid from tax revenues) can earn more than the prime minister's salary (about EUR 230,000 per year before tax = 12x times the minimum wage = EUR 19000 per year before tax). The effective tax rate is 40-45% for everybody - mainly because mortgage rent is deductible, the Netherlands has an almost flat tax system.

      The law applies to a couple of thousand people, and is (too) slowly making itself felt (new appointments must be according to the law).

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  22. True equality only has a chance when we stop worshiping those who forced it on us in the first place, not by grovelling at their feet.

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    1. Rather...true equality only has a chance when we stop worshiping those sociopaths who forced inequality (and much worse) on us in the first place, not by grovelling at their feet.

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  23. How are you defining the CEO wage? I hope the definition is based on total compensation which would include any and all stock based compensation. Otherwise, your ceiling would become meaningless very quickly.

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  24. Silicon heavyweights like Steve Jobs and Zuck implemented maximum wage. Now they face an anti trust suit.

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  25. Simon,

    Nice post. I think you would enjoy a TED talk by UK comedian and writer Tony Hawks (https://www.youtube.com/watch?v=fgfQLTIhi1U). He suggested a couple years ago an idea for a maximum income, but with a twist. He suggests that we really don't want to deter or punish anyone who is naturally creative, industrious, energetic, from making lots of money. Often we all benefit when they do. Hence, a maximum could be applied to determine only how MUCH of the income an individual generates he or she can keep. The rest would have to be given away to a charity or charities of that person's choosing. Hawks' idea is that if such a system came into place, there would rapidly be a proliferation of charities competing to do good things to attract this money, and also a competition between wealthy people to out-do others in making wise and useful and big gifts to the best charities.

    Ultimately, people do care about more than money. Much of the pursuit of vast wealth I suspect is ultimately about competition for status. Status can be had by philanthropy as well as by hoarding wealth. So I think Hawks has a good idea. Thanks for raising this question!

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  26. Not a new idea. American populist Huey Long proposed a cap on income and wealth in 1934 as part of his "Share The Wealth" plan. If you haven't read it, you should -- it has stood the test of time very well.

    http://hueylong.com/programs/share-our-wealth.php

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  27. The idea of a "maximum wage" may not have much support today in mainstream economic circles, but the notion of capping income figured prominently in the struggle against America's original plutocracy.

    During World War I, a mass citizen's campaign called for a 100 percent tax on all individual income over $100,000, an effort that helped jump the top U.S. marginal tax rate from 15 to 77 percent.

    During World War II, after widespread maximum wage advocacy in the 1930s, President Franklin Roosevelt proposed a cap on individual income over $25,000, the equivalent of about $365,000 today. FDR didn't get his cap. But he did eventually win a 94 percent top tax rate on income over $200,000.

    Today's maximum wage action seems to be revolving around ratios and the idea of leveraging the power of the public purse to discourage excessive executive pay. This past spring, the Rhode Island State Senate passed a bill that links government contracting decisions to executive pay levels, the first U.S. legislative action ever that rewards enterprises with a reasonable ratio between their CEO and worker pay.

    More background on the Rhode Island and related efforts here:
    http://toomuchonline.org/turning-tables-tax-spend/

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  28. The suggestion that we should not worry about national inequality because global inequality has fallen is even more bizarre.

    This is misleading anyway. Global inequality as measured by the gap between the wealthiest and least wealthy has increased - even if the rise of East Asia has reduced absolute numbers in poverty, Africa and the Middle East have arguably fallen further behind.

    Sorting out the problems in Africa and the Middle East is important, if not for its own sake, for worldwide security.

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  29. I'm afriad that I have never paid more than cursory attenttion to the issue of poverty. Simon Wren Lewis's blog, although about setting a ceiling on wages, got me thinking about the issue.

    I hope he will continue to develop his idea. Of course, after a thorough investigation, he may conclude that a maximum wage isn’t such a great idea after all. But at least then we have a reasoned basis for rejecting an interesting idea.

    I've occassionally wondered - How does one go about settting a minimum wage, anyway? And why isn't it in some way pegged to the nation's median income? After all, a nation's poverty line is often defined as half of the national household median income, isn't it?

    Let's say that the median income of a UK household of three is £30,000 (Note: This is not from any published data. I don't know the exact figure). Then the poverty line of a household of three is £15,000 p.a.

    Now, if the UK minimum wage were pegged at £15,000 then, provided that at least one member of a household is in employment, that household would probably not fall below the poverty line.

    Could we peg the maximum wage to the median? I'm afraid I've thought even less about this than I've about minimum wages. But, offhand, I would assume that the reasons for setting a maximum wage would be quite different from those for a minimum.

    I shall revisit this site occassionally, to see if someone has some refreshing views on this.

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  30. Of course there is an practical way of implementing a maximum wage. We even used to do it, and got some of the positive results from it modern theory would suggest.

    Its called a 90 cents in the dollar top marginal tax rate.

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