Maximum Wage | A Stop to the Ridiculous Pay at the Top?

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Thought of by Aristotle; planned by Roosevelt and Implemented by J.P. Morgan. Ever since the days of Adam Smith, the father of economics, one issue has prevailed…inequality. Millions of economists have come and gone but not one has been successful at eradicating this issue. But has the answer been lying ‘right under our noses?’ Would the introduction of a maximum wage work to reduce inequality?

How would the system work?

Inequality refers to the gap between the richest and poorest members of society. Inequality divides further into income and wealth inequalities, with income referring to the money one earns and wealth being the assets in your possession. 

One method of implementing the maximum wage is through a policy known as: ‘Maximum Liquid Wealth.’ Restricts the value of assets an individual is permitted to maintain. However, it gives unrestricted access to money in bank accounts. Some would say that it enforces the ideals of a maximum wage without hampering levels of economic growth. However, other would say the policy merely serves as an empty threat as it provides no restriction to personal savings and hence is pointless. 

An alternative solution that exists is known as a ‘Relative Earnings Limit’ which is what first comes to mind when thinking about a Maximum Wage. This is a ratio or a cap imposed within corporations to help reduce the gap in pay between the most junior staff and the executive directors. If implemented within individual companies, it would mean that CEOs could become freelancers and all join one company. This would allow all of them to continue to earn such large sums of money because there is a ratio between all the top earners and not everybody. 

But what would the effect of its introduction actually be?

What would it do?

The simple effect of introducing a National Maximum Wage would be that inequality would be reduced. The gap between the rich and the poor can be narrowed with regards to income. It also works to tackle wage-push inflation, which is where the price of goods and services keeps rising as a result of continuously rising wages. This will stable out the price level in the economy in the long run and mean that the chance of any volatility is slim to none. 

Opponents to the idea would suggest that it would be a disincentive for people to work. However, as Jeremy Corbyn put it: “This is not about limiting aspiration or penalising success, it’s about recognising success is a collective effort and rewards must be shared.” 

The people at the top will be earning less and those at the bottom will be earning more. Quite simple…or is it?

Why is it risky?

A key weakness in this system is that it drives firms away from the UK and provides greater incentive to outsource labour. Which then could lead to unemployment in our country and hence be seen as a ‘backfire’ to the policy. Other even pose the question as to whether a new system is necessary. What is wrong with the government’s tax system? Downing Street has racked up a huge budget deficit of around £80 billion. The tax system has helped to keep this minimal but a call to lower taxes and implement such a system does not come at a small price.

We have now seen how a maximum wage would work, what it would do and the potential risks it poses.

So what do you think? Is it time to put a stop on those at the top?