Maximum Wage

DEFINITION of 'Maximum Wage'

A ceiling imposed on how much income a worker can earn in a given period of time. A maximum wage is an economic tool used to temper a distressed economy or control spiraling wage inequality in a country.

BREAKING DOWN 'Maximum Wage'

The idea of a maximum wage can be traced back to Aristotle who believed that no one person in Greece should have more than 5 times the wealth of the poorest person. Maximum wage is increasingly becoming a frequent subject of debate in the 21st century as more CEOs and top executives take home millions of dollars in earnings compared to the minimum wage earned by some of the employees in the same companies.

The maximum wage can be incorporated country-, industry-, or company-wide. The communist country of Cuba has long had a maximum wage capped at $20 per month for almost every job across the nation. Egypt’s banking industry was hit hard when over two hundred executives resigned after the country’s Central Bank applied a maximum wage law of approximately $5,800 monthly. Switzerland initiated a referendum in 2013, which failed to pass, that would have limited a company’s executive pay to twelve times the lowest paid employee’s wage.

A maximum wage can be initiated in two forms: As a fixed sum or as a ratio. Franklin Roosevelt, in 1942, proposed a marginal tax rate of 100% for income over $25,000 in order to discourage war profiteering and encourage the rich to make sacrifices in monetary earnings. If Congress hadn’t rejected Roosevelt’s proposal, $25,000 would have been the cap that any income earner in America was limited to earning annually.

In 2017, British politician, Jeremy Corbyn, following Britain’s decision to exit the European Union, called for a CEO-to-worker pay ratio of 20:1. If passed into law, this would mean that top executives of companies vying for government contracts would not be able to earn more than twenty times the annual income of the companies’ lowest paid workers.

Proponents believe that a maximum wage is sure to bolster the economy. If senior officials earn less, there will be more money put into the company that can be used to create more monetary benefits and incentives for employees. The additional funds can also be used to create jobs and hire more employees. With more people working, more taxes will be paid, which in turn means, the government and the society benefits from a reduction in wages of top executives.

Also, if the wages of top earners of a company are tied directly to that of the minimum wage employees in the same company in the form of a ratio, it is believed that the top managers will be incentivized to increase the minimum wage in order to get an increase in pay themselves. This creates another win-win situation where profits trickle down to the company, government, and economy.

Critics and capitalists argue that when a government gets involved in the price controls of an economy, the economic state of a free market is compromised. By setting maximum wages, companies would have fewer talented leaders and employees, as the more valuable talents would be unwilling to work for a capped fee. A maximum wage legislation could set the stage for human capital flight where the most talented individuals emigrate to other free nations that could pay them their worth. In effect, setting such a policy then, would not lead to a more productive and profitable economy like the advocates believe.