Maximum Wage Law

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.

Maximum Wages

Wage

To have any effect, a maximum wage  (Max P) should be put below the equilibrium for that labour market (Pe).

Arguments for maximum wage

  1. People earn too much and they ‘don’t deserve it’.
  2. It helps to reduce costs for firms.
  3. In some labour markets, labour may have the ability to bargain for wages which include substantial economic rent.
  4. 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

  1. 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.
  2. 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.
  3. If firms are willing to pay high wages, then presumably the workers must have a value (Marginal Revenue Product) equal to their wage.
  4. 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)

Minimum wages

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.

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By on July 8th, 2017

10 thoughts on “Maximum Wage Law

  1. “… But the government gets nothing in return.”

    Not at all the case. A maximum wage is redistributive, in that anything that would have been paid but isn’t because of the maximum wage is placed to other purposes. This could be the wages of co-workers, dividends to equity holders, capital reinvestment, or any number of other things.

    The thing that all these things have in common is that they either directly or eventually increase the taxable base and therefore either increase tax revenue or lower tax rates. Either of these is certainly something that government gets in return.

  2. I have read his blog for more than a year and I feel that it is just fine with or without bullets. At least it’s presented in paragraph

  3. “Firms may find a shortage of skilled workers or top executives, this could harm economic prospects.”

    well, as a shortage of these individuals would arise, others would be more than willing to step into place, indvivuals that would accept the wage as having been higher than what they had been reciving before. Think of people that would actauly try to improve thamselves to fit the ocupation. On top of that if a company was mandated that the highest pay scale would only be 20 times the lowest pay scale it would cause more companies to increase their based pay, the wage that the majority of its employees make, in the effort to sustain a higher pay for its top executives. This action would increase the disposable income of the nation at large and would, in the long term, actually help the company by increasing sales.

  4. You forgot the major advantage of a maximium wage it stops the distortion of the labour market where talented people go into the sector with the highest wage ( financial services)
    this robs other sectors of talent. this then harms invovation causes other sector of the economy to stagnate and then fail. it also means that the economy is more balanced and we can start to re introduce manufacturing and get the country working. it works in germany so why not the uk.
    We have talent we still have people with skills( though not for much longer if things don’t change) we used ot make the best in the owrld and we can do again.
    and it start with a maximium wage

    1. If you look at the chart you can see how a maximum wage would actually affect the graph. Placing the maximum wage above the equilibrium would not affect the graph. It would be a null constraint. On the other hand placing the maximum below the equilibrium wage would force the equilibrium down. Seemingly flattening out the wage spectrum.

  5. “People earn too much and they ‘don’t deserve it’.”

    “If firms are willing to pay high wages, then presumably the workers must have a value (Marginal Revenue Product) equal to their wage.”

    These two statements contradict each other. Which one is right determines whether a maximum wage is morally sound or not (apart form any practical issues both pro and con). My money is on the first statement because humans naturally overestimate the value of top positions in an organization.

    Anyway, it’s a bit suspect that the only people advocating furiously for unlimited compensation are people who expect to become rich, people who are already rich and the less mathematically inclined type of economists (their more mathematically inclined brethren excel in exposing just how distorted claims of super-high productivity among executives and their ilk actually are).

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