Should there be a maximum wage?

Josh Leivers

Maximum wage - a price cap enforced on how much salary a worker can receive in a given period of time.

A maximum wage can be seen, in many cases, as a ploy to satiate social justice, but is this always the case? Would a wage limit prove economically beneficial or is it simply just a call to satisfy lower earners? To provide clarity on the matter, it is best to investigate an industry that has already imposed a maximum wage and to scrutinise the ramifications of such a decision, making a judgement as to whether this is effective, or even necessary.

In the industry of professional basketball, all teams have a maximum sum they can pay (bid on) any player when it comes to offering a contract. Now there are obvious positives to this: namely that it largely benefits teams with less financial backing. As a result, these teams do not have to compete (to an extent) with larger teams that can afford to offer players extraordinary amounts of money to play for them. Furthermore, the high set wages are more than sufficient, with players generally having little to no issue with the compensation they receive. Hence, a maximum wage can have profitable results, helping to balance the economic scales, while not having a reduction in economic growth or production. In fact, there are further arguments that corroborate such an approach. Particularly in a profession like sport, where teams can spend inordinate sums due to the sport's large commercialisation and viewership, exploring the maximum wage approach could prove beneficial in evening out the playing field. This could possibly make the games more well-rounded and strengthen competition – arguably the ultimate objective of sport.

However, it is important to realise that such an example is occurring in an incubated industry, where the impact of a maximum wage is perhaps not as widely felt. It can be argued that the effect of a maximum wage could be adverse in the manufacturing industry.

As the goal of an individual firm is to maximise profit, the idea of a maximum wage could initially sound enticing, especially as the implementation of a maximum wage would reduce the cost of employment, with money reinvested back into the company for additional growth. Although, in an argument against this, it is much more likely that by manufacturing a wage cap, production would depreciate. But what do we mean by this?

It can naturally be assumed that the passion to work partly comes from the desire for an income, with a higher income inviting additional desire for an increased wage. However, a salary cap would only prevent growth within our economy and increase unemployment. This is because the quantity of labour demanded by a given firm far outweighs the quantity of labour that workers desiring a higher wage would supply. Therefore, the idea would be disadvantageous to firms, losing them money. Moreover, companies would have less profit (since fewer workers lead to less output and therefore less profit) and employees would either begrudgingly accept the ceiling imposed on their earnings or move to another field. Employees demanding to move further opens up significant job vacancies in specific fields.

Although, on the one hand, by following the law of diminishing marginal utility, one could argue that the effects of a maximum wage would result in little dissatisfaction. This is because, as consumption increases, the satisfaction from each additional unit falls. This would be the case if the limit was high enough that the individual's well-being and lifestyle were not significantly affected, and they can live a fulfilling life. Under these circumstances, then a wage cap would prove useful and equitable. For example, say £80,000 per annum was enough to live on, while also being able to afford a nice home, cars and holidays, then extravagant wealth seems unnecessary and greedy. If a diminishing rise in satisfaction can be observed from a salary over £80,000 then a maximum wage could potentially prove possible. On the other hand, it is also theorised within economics that there is an unlimited amount of wants and needs. This could result in major dissatisfaction, with the wants of the consumer not easily being met under their current maximum pay bracket.

Lastly, a more nuanced approach - taking into consideration the economic inefficiency but also the ethical dilemmas, may be more worthwhile. Perhaps done by increasing tax. This could be carried out by increasing the percent tax in the highest current tax bracket, or by a slow bracket creep, where the brackets are not adjusted in line with inflation. In this approach, the wealth can be redistributed to lower-income households, allowing for an arguably ‘fairer’ system of taxation. This would achieve the social justice that a max wage is intended to perform, while also reducing the amount of highly skilled workers that would have been unwilling to work (with a max wage). Furthermore, the government would have an increase in revenue, allowing them to control areas for investment to grow the economy.

Ultimately, a maximum wage would be a failure and adverse to economic growth. The salary cap would cause a supply issue for high-skill workers, all of whom expect higher pay for their services and result in a withdrawal of workers from their country, who would seek work elsewhere without a salary limit. A huge reduction in labour, a key factor of production (FOP), would cause a large inward shift in the UK Production Possibility Frontier (PPF). This means a significant reduction in total production, national income, and GDP.