Readers Question: I would like to know why in the USA we have minimum wage law but not a maximum wage law? What are the advantages and disadvantages of a maximum wage law?
A maximum wage means that for specified industries, jobs, wages cannot exceed a certain level. They may be used to regulate labour markets where workers have excess monopoly power or in an unusual circumstance – such as a period of war. They are rarely used.
To have any effect, a maximum wage (Max P) should be put below the equilibrium for that labour market (Pe).
Arguments for maximum wage
- People earn too much and they ‘don’t deserve it’.
- It helps to reduce costs for firms.
- In some labour markets, labour may have the ability to bargain for wages which include substantial economic rent.
- Prevents the most skilled labour migrating to the highest paid jobs. For example, if lawyers received very high wages, the best graduates may train to become lawyers, but this means other job sectors, such as doctors, engineers would not attract the best workers. Doctors and engineers may have greater social value than lawyers.
Maximum Wage in Professional Football
There was a maximum wage for professional footballers in England up until 1960. The maximum wage for footballers was £14 per week (1951), £15 (1953), £17 (1957) and £20 (1958)
With many clubs on the face of bankruptcy, some argue, the Football League should consider a return to a maximum wage – to prevent clubs spending more than they can afford on wages. However, this is really focused on the peculiarities of Football economics – where clubs have a tendency to push themselves towards the brink of bankruptcy.
Arguments against maximum wages
- If you want to reduce wages, why not increase income tax? A maximum wage limits the income of high earners, but, the government gets nothing in return. If you want to reduce incomes of high earners, you could just impose high rates of marginal income tax on high earners. This raises tax revenue for the government which can be used to redistribute income.
- Disincentives to work. A maximum wage may encourage workers to leave and work in another country. Firms may find a shortage of skilled workers or top executives, this could harm economic prospects.
- If firms are willing to pay high wages, then presumably the workers must have a value (Marginal Revenue Product) equal to their wage.
- Apart from specific industries, there is little benefit of imposing a maximum wage, save perhaps a mild feeling of social justice that people don’t deserve to earn too much. (whatever that value is)
Many countries adopt a minimum wage legislation to increase the incomes of those on low pay. In theory, a minimum wage in a competitive labour market would cause unemployment (supply greater than demand) However, in the real world, many labour markets are monopsonistic, and evidence suggests at certain levels minimum wages don’t cause unemployment. The ideal minimum wage is disputed, but, there is significant support for, at least some form of minimum wage.