Maximum Wage Differential
The answer to fixing the wealth gap and repairing the income gap is not by redistributing wealth through taxation. Redistribution schemes are inefficient and notoriously unpopular among the population. We hope to maintain incentives and growth in businesses throughout our economy. The answer is to mandate a federal maximum wage differential. This would reduce the allowed difference between the highest paid worker and the lowest paid worker. I suggest we mandate the highest paid employee earn no more than 50 times (Robert Reich suggested 100 times) the lowest paid domestic employee in a company, and no more than, perhaps, 200 times a foreign based employee. Each foreign nation would get a different mandated maximum and the U.S. would get a new tool for trade negotiations. I have, so far, been unable to discover any negative effects of this policy suggestion. The typical arguments usually fall to exporting jobs, increasing unemployment, and removing incentives. I will discuss these topics and the benefits such a structure would have on corporate leadership below. I will discuss the existing “old guard” CEOs and their impacts on leaving companies like Wal-Mart. Lastly I will discuss the impact on small business.
If we mandate the differential as I have stated above, then it will encourage domestic production. CEOs who wish to earn more money will be incentivized to produce inside the United States since U.S. workers earn more money, thus allowing the CEO to earn more money as well. Jobs will come home and Americans will be wealthier for the change. Domestic production will increase and unemployment will decrease. The mandate can bring jobs back to the United States. This will raise consumer prices to some extent, but higher wages will offset the harmful effects of the policy.
By minimizing the wage differential we can decrease unemployment levels through the new incentive a CEO has to expand a company. Existing CEOs may be risk averse, once they have certain stock options or yearly wages, choosing less risky ventures over growth maximizing expansions. CEOs who wish to get a raise will want to expand their businesses so they can afford to give raises to the people at the bottom of their pay structure. Providing increased pay at the bottom will allow the CEO to get a raise at the top. Everyone in between will also benefit. Expansion means more jobs and higher pay for everyone.
The removal of incentives, as occurs with socialist movements and wealth redistribution policies, is really a moot point since this structure provides new incentives not faced before. CEOs have an incentive to expand, they have an incentive to improve productivity, and they have an incentive to pay their employees more. They have an incentive to produce domestically, and they have an incentive to make good decisions. Business owners and CEOs alike would have every incentive to make their business as profitable as they could, without the incentive to decrease pay in order to nominally increase profitability. They would have to find other, more equitable, innovative ways to save money. CEOs would need to invest in new technology, research, and education. Investment into renewable and sustainable activities would all be observable gains from such a system.
There is one somewhat valid argument I have heard against this idea , but under scrutiny it reveals a free market resolution. “Old Guard” CEOs, those who control larger or more established companies and have been around for a long time, may not wish to stay in their position since staying would mean a significant pay-cut when compared to their existing pay structure. Let them leave. New, innovative, more ambitious, forward-looking leadership will take over these companies. Maybe this is good for an existing company and possibly it is bad. If it’s good then the companies will tip into an era of profitability they have not seen for some time. If it’s bad then companies may fall into bankruptcy. If companies begin failing, for example if corporations like Wal-Mart fail, then that makes room for new corporations to compete or existing businesses to expand (just like Target supplanting K-Mart as Wal-Mart’s main competitor). Either way, the system motivates fresh perspectives and new businesses to enter the marketplace.
The last argument that always enters the political-economy is how new policy affects small business. This is a tough situation, but it too has an easy answer. Any small business under a certain size, perhaps 200 employees, will not be subject to this rule. Franchises would not count, since they are under the purview of a much larger corporation, but truly small businesses should be allowed to grow until they reach a predefined tipping point. If this is unfair competition in favor of small business, so be it. According to the SBA Office of Advocacy, small business accounts for more than 64% of net new jobs created between 1993 and 2011 (11.8 million of the 18.5 million new jobs).
Other nations such as Denmark and Switzerland have already adopted similar systems to the one I propose. They have increased economic mobility, decreased wealth and income gaps, and achieved a greatly improved standard of living as a result of their changes. Their systems function well and have even spawned a joke about the American Dream. “If Americans wish to live the American Dream, they should go to Denmark.” — Richard Wilkinson
“Maximum Wage Differential” is a section from my book, “Three Handed Economist: Interior Solutions in an Ideologically Cornered World,” available here. If you would like to get news of more posts like this one, follow me on Twitter @memarf1, visit my blog, “Modern Sense and Economics,” here, and like my Facebook page, here.
