Monday, October 26, 2009

Guest Post: Should we have a maximum wage? Stuart Jeffrey

Thanks to Stuart Jeffrey for this first post in a short series of articles on economic themes I'm going to be publishing over the next couple of weeks. Today we take a look at the idea of a maximum wage.

Thirty years ago a newly elected Conservative government attempted to quash a ground breaking report by Douglas Black. The report, commissioned by the previous government, was a clear indictment of the impact of poverty (and relative poverty) on health. Just few hundred typed copies of the Black Report, as it come to be known, were ever published but the impact of the report was significant and has been a basis for public health thinking ever since.

Moving forward 30 years, The Equality Trust explain in graphic detail how it is not only poorer countries that have poor health outcomes, but also that countries which have higher inequalities have poorer health outcomes. These poor health outcomes are not just relating to physical health but stretch across the full spectrum from mental health to societal health (for example violence, community cohesion and social mobility).

The evidence is clear, an unequally society is a poor society. The evidence is also clear that Britain has become more unequal; this quote is from National Statistics: "Between 1981 and 1989 disposable income in real terms grew by 38 per cent for those at the 90th percentile. This was more than five times the rate of growth of 7 per cent for those at the 10th percentile.". A quick look at their graph of income since 1971 shows that the gap between rich and poor has grown continually except for a short period in the mid 1970's.

National Statistics also report that '1992 to 2006/07 was a period of relative stability' for income inequality. The minimum wage, introduced in 1999, has had an impact for some but it simply hasn't achieved the narrowing of relative poverty that is required. Two further mechanisms for household income are necessary, a citizens income and a maximum wage.

Maximum wage is simply capping the maximum earnings of an individual, either through the use of a tax bracket that returns 100% of the earnings to the state or through primary legislation to prevent employers paying over a particular ceiling. Practically speaking, a 100% tax bracket looks like the most effective method of implementing a policy as it should capture unearnt income and income from multiple sources (assuming that people don't dodge tax!).

While there are those in favour of a maximum wage, such as Andrew Simms from the New Economics Foundation, there are of course detractors on the right of the political spectrum. It is easy to see why it is the right wingers who are opposed, given that the majority of high earners are on the political right and the rest of the right are desperate to join them. The Adam Smith Institute claims that the country's most productive workers (doctors, business owners and bankers - it does actual put bankers in this category) would move abroad. They go on to suggest that the best was to reduce poverty is through the 'Trickle Down' of wealth.

Standard right wing thought but the evidence goes contrary to this.

Firstly the concept of 'Trickle Down'. It is surely time for this phrase to be consigned to the dustbin of patronising and obnoxious terms. Trickle down suggests that the elite should hold the nations wealth and provide a little cash to the underclasses to stop them starving. It suggests that people are not equal and shouldn't strive to be. It keeps the ruling class, er... ruling.

The concept of trickle down serves to widen the poverty gap within countries by enforcing and expanding the existing inequalities. Sure, it will address absolute poverty and may increase a nations overall wealth, but that is not what needs to be addressed.

Secondly, the claims that productive workers will flee the country are without evidence. Of course the Adam Smith concept of 'productive' is a little different to the concept held by the majority of people. Ask the man on the Clapham omnibus whether he considers nurses or bankers to be more productive!

Concerns about highly skilled workers fleeing the country are also misguided. In Cuba, doctors are paid around twice the national average wage, compared to around four times in the UK, however Cuba has one doctor for every 174 people and the UK has one for every 600. There would be a balance of greed versus good community that people would weigh up before emigrating for financial reasons. If society was cohesive and enjoyable, it is unlikely that most would want to leave for a country where the quality of life was poorer. There is far more to life than hard cash.

Assuming that the majority of the arguments currently against a maximum wage are false, there remain just two questions. Firstly would a maximum wage actually help to reduce inequalities and secondly what should the level of maximum wage be?

If the approach of a 100% tax bracket is used and the taxes are reinvested in citizen's income / health care / regeneration / redistributive schemes, then it is clear that inequalities will reduce. The longer term picture of a 100% tax bracket gives similar results to a maximum wage through primary legislation over time as companies stop advertising jobs with huge salaries. As total income, including unearnt income from profits, could not exceed the maximum, money would need to be spent somewhere in society over time (unless company's reserves get bigger and bigger - maximum profits legislation anyone?). The gap between the rich and poor will start to close.

And as for the maximum wage... let's start at £150k and reduce it by £5k a year to £100k. Anyone not able to survive on £150k or even £100k needs to think very carefully just what they are doing to society and the planet.


DocRichard said...

I recall a few years ago we had a motion come to GP Conference setting out a maximum wage. It was terminated with extreme prejudice and the usual combination of innuendo and contempt by the Handbrake Tendency. Pity.

Jim Jay said...

Someone asked me about this a little while ago and I was trying to remember why it was voted down. I've a feeling it was something about the wording rather than the principle - but can't for the life of me remember the ins and outs... do you remember?

Matt Sellwood said...

I don't think it was to do with the wording, but the PR impact, basically. If I remember rightly, Darren J and others argued that it would be electorally suicidal and that a high tax rate was adequate anyway for what we want to do, I and others argued that it was an essential component of a radical equality agenda.

To be fair, the 'everyone would just evade it anyway' argument also came up, although I don't buy that. We don't abandon laws against thieving because some people break them, after all!

It's an interesting discussion whose time has come again, I think.


P.S. Apologies if I'm misremembering the debate, but I don't think I am?

David Cox said...

I don’t believe any of the most income-equal societies identified in the Spirit Level/Equality Trust have maximum wages. In fact one of the most unequal societies, used to have a de facto maximum wage the United States! From 1942 until 1964 the highest US tax bracket had a rate of 91%. I’m not philosophically opposed to a maximum wage, and there are economic advantages, I just don’t believe such a policy is an effective driver for equality.

There are alternative policies, for example a relative earnings limit. Denmark doesn’t have a maximum wage, yet is one of the most income-equal societies. In Denmark they have a relative earnings limit- a link between the lowest wages and highest - so no one may earn more than seven times the amount the lowest paid worker in an organisation. Ergo if your shop-floor workers are getting £20,000 a year, £140,000 is the maximum the Chief Executive/top earner can receive. This greater equality is not a dis-incentive to business, quite the opposite; US business magazine Forbes says Denmark has the ‘best business climate in the world’.

Denmark is usually ranked as one of the happiest place in the world, with the highest standards of health, welfare, and education; of course income-equality is the major contributor to this, but it isn’t the whole story. Don’t forget more equal societies are better for everyone even the rich.

BTW of the ten most equal countries according to the Spirit Level/Equality Trust, seven are constitutional monarchies. Of the ten most unequal only three are constitutional monarchies –all sharing the same monarch.

Red Green Nick said...

The Danish idea sounds a good one, although I would certainly support a Maximum wage as Green Party Policy, as it sends out the right signals that we are committed to a more equal society.
I can't see how it can be a vote looser really, how many of the super rich vote for us anyway?
Cuba, as well as having some of the most equal rates of pay, is according to the WWF Human Developement Index the only country
with sustainable developement.
Hopefully the mood in the Green Party has shifted.

Rupert said...

The case for equality is overwhelming. And I think that the case for a maximum wage is very strong. However, it is also very far from being practical politics right now, and it is easy to mock and attack and could make the Green Party vulnerable to particularly unpleasant right-wing-media assault (which is why it was voted down in the debate, a couple of years back, so I understand). Furthermore, you have not addressed the very grave difficulties in introducing it in any meaningful way, Stuart: such as the fact that a maximum wage, that made it impossible for high-earners to earn ANY more, would be something that high earners put enormous effort into bypassing via dividend payments, etc. etc
My proposed more modest alternative, which I think is practical politics and would actually work, is this:
• A maximum income differential in percentage terms between boss and lowest-paid employee in each company. And the differential should be narrowed in percentage terms each year. It should never be allowed to grow in absolute terms at all. (This idea is a slightly more subtle and equality-friendly version the Danish law referred to above.)
• Wage rises should be on a cash-amount basis, not a percentage basis. In other words, everyone in a given organisation would get the same wage rise, each year, in monetary terms. Over time, this would reduce the percentage difference between high adn low earning employees very considerably, and eventually might make it trivial.
The beauty of my proposals (you need both, because the second one only applies if there is an actual wage/salary _rise_, which in a recession there is not) is that they _encourage_ the higher wage earners (including top bosses) to raise the wages of the poorer workers in their company/organisation. And they actually narrow the rich-poor gap - they diminish relative poverty - in the process. In other words: they attack inequality, and bring equality nearer, in a way that doesn't render the better-off as angry resisters of the process.

Peter Cooper said...

Bonkers. People wouldn't bother to set up anything more than lifestyle businesses if income were so limited. If Bill Gates could have only made £100k a year, why expand Microsoft beyond a small software development shop? The temptation of bigger rewards results in bigger companies and higher employment.

Jim Jay said...

It's al coming back to me now - it was the phrase 100% tax rate that set people's heart rates a flutter. I think they imagined the headlines - "Greens vote for 100% taxation" you see, that just makes me want it all the more, after all at least then the press would have something worth covering at conference.

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