Manifesto #3: Maximum Wages

Much of our activism on the left in regards to wages revolve around campaigning for significant increases at the lower end. But when bankers, CEOs of major companies and sports stars are making enormous sums on a weekly basis, should we be looking at the top end? In her third #ConterManifesto column, Eve Livingston investigates the viability of maximum wages...

Of all the economic battlegrounds between left and right, few are as incendiary as wages themselves. They're, after all, the literal price put on capitalism’s most treasured weapon, the relationship between worker and boss – and so arguments about wages are rarely about money so much as they are about control, hierarchy and ideology.

We might take for granted broad cross-party support for the national minimum wage, for example, but any discussion about its levels or delivery is still sure to ignite heated debates. It’s this ideological underpinning and its relationship to vague concepts of deservedness and status that render almost any discussion of wages at the top end of the market completely taboo in policy terms.

While almost all developed countries have a minimum wage in law or through collective bargaining, the only examples of maximum wage legislation globally are industry-specific or in economies such as that of Cuba and Egypt which are virtually incomparable to the UK. But with national minimum wage entirely failing to keep pace with the average pay of FTSE 100 bosses and Fat Cat Day – when the average chief executive will have earned more in a day than the average worker will in a year – now falling as early as January 4th, it might be time for serious consideration.

As with any economic policy, ‘maximum wage’ is ultimately just shorthand for a number of potential mechanisms that seek to close the gap between wages at the top and bottom end of the labour market and put brakes on the unbridled hoarding of wealth that occurs in the former. In its most controversial form, maximum wage legislation could operate as an outright cap on earnings – an initiative which has been most robustly tested within the sporting world.

Contrary to an oft cited hypothetical, a maximum salary in the USA’s professional basketball league has not led to the flight of top names but has arguably served instead to elevate and develop middle-range talent. In contrast, though, a maximum wage for UK football players in the early 20th century was the catalyst for industrial action which resulted in its repeal in the 1960s.

While a straight cap on earnings is fairly self-explanatory, another more complex option exists: a cap on the amount of overall liquid wealth an individual is allowed to hold at any one time. In this proposal, individuals can still hold excess wealth but it's stored in assets such as property, bonds or business rather than individual savings so it's active in the economy. Thus, a cap on liquid wealth is often advocated on the basis it enacts the principles of a maximum wage without restricting economic growth or incentive.

The danger of legislation of this type, though, is that it represents a direct targeting of a clearly defined group without making clear how it will benefit others. In theory, a well-connected and well-resourced group of campaigners are mobilised both to agitate politically and, potentially, to engage in tax evasion or avoidance in order that the wealth they see as theirs is protected from such ‘attacks’.

Taxation can provide another option for implementing what is essentially a maximum wage, with the added benefit that reclaimed capital is then guaranteed to be used in redistribution. In 1942, this is what American President Franklin D. Roosevelt attempted to implement when he proposed a 100% tax on all income over $25,000 - approximately $365,000 or £272,000 in modern money.

His proposals were not taken forward, but the USA in some senses operated a de facto minimum wage for many years after the Second World War pushed the top tax rate to 90%, adjusted to 70% by the Kennedy administration, where it remained until Ronald Reagan’s presidency in the 1980s. In practice, this high tax rate incentivised employers to modestly raise the salaries of those on middling wages, enacting the principle of trickle-down economics that it can never quite enact itself. Productivity was higher and growth greater with the higher levels of taxation, but the 90% rate was opposed by an organised owner class who succeeded in seeing it lowered, and the top rate has stood at 40% since the era of Reagan (below with Margaret Thacher).

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Perhaps the most compelling way to implement a maximum wage of sorts, then, is by tying it to minimum wage legislation or the lowest wages in a given organisation as a ratio, the option put forward by Corbyn’s Labour in their 2017 manifesto, which set the ratio at 20:1. This option arguably encourages a healthier political dynamic than either outright caps or 100% taxation because the rich are given a vested interest in the wellbeing of the poor, with top wages still able to rise but only if those at the bottom end are taken with them.

As seductive as capping excessive pay on principle might be, research shows that inequality is best targeted by raising lower wages over reducing high ones; a ratio system set at the right level (admittedly the million dollar question) therefore raises the minimum floor whilst also guarding against skyrocketing salaries at the top end. And if maximum wage as a concept seems too radical to achieve mainstream buy-in, pay ratios prove an easier sell. Organisations such as the John Lewis cooperative already operate them - in their case at 75:1 - and have largely enjoyed strong profits and reputations as generous and supportive employers.

As is a theme with utopian ideas on the left, a maximum wage is by no means a panacea for the growing inequality clawing away at our society. Any mechanism by which it could be achieved is also vulnerable to considerable loopholes, mainly due to the complexities of the UK’s rich economy and the way in which it's built to protect individual wealth at the top end of the market. Investments, assets and bonuses, for example, present a challenge to maximum wage legislation owing to their categorisation as different forms of wealth.

Calls for maximum wages should also be guarded against misappropriation: David Cameron, for instance, implemented a straight-out salary cap during his tenure as Prime Minister – but it only covered already underpaid public sector workers, serving as a tool by which an increasingly ravaged welfare state could be further hollowed out, and setting pay levels way out of line with inflation and the private sector.

But even for a self-interested political class, the widening inequality gap is an urgent and inescapable problem even on their own terms, as economies with high inequality are also those with the lowest levels of growth. A number of studies have suggested there's no discernible increase in wellbeing when one’s income surpasses a certain level, but there would certainly be an increase in the wellbeing of society as a whole were any wealth beyond that level redistributed in progressive and innovative ways.

Too often arguments about wealth and wages are framed in terms of individual freedoms, a product of a capitalism that has tricked us into thinking our worth is defined by our financial value, and our financial value defined by our deservedness.

But we know that hard work doesn’t always pay, and that those who are most deserving are often also the worst off. Individual freedoms have societal ramifications, a truth we have long been comfortable with acknowledging when it comes to imposing arbitrary rules on the working classes. If moral conditions on how to spend your time, money or benefits are good enough for the poor and unemployed, they should be good enough for the super-rich too.

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@eve_rebecca