A new report by the left wing think tank Autonomy has reignited debate about the concept of a maximum wage. The idea that the government should not only dictate the minimum someone can be paid (as it already does in many countries, including the UK) but also the maximum, has been given new impetus by the Covid crisis, which, as is the case with most economic crises, is set to hurt those at the bottom of the income scales the hardest.
Autonomy commissioned the pollster Survation to ask the British public about their attitude to the introduction of wage caps, and, unsurprisingly, the increasingly left-wing Brits were in favour, with 54% supporting the measure, the majority thinking £100,000 would be the best cap on earnings per year. Of course, it is beyond dispute that the vast majority of those who support the policy do so without having spent any time whatsoever thinking about what it actually means and what its consequences might be, they merely think it sounds good. But you can’t throw that accusation at Autonomy: they’ve written a report on it, so they must have analysed it in detail. But what does their analysis actually entail? A look under the bonnet of their ideas reveal what you’d suspect: the reason they are in favour of a maximum wage is that the way think about it is both naïve and ridiculously simplistic.
Autonomy’s methodology is purely concerned with estimating the shape of the distribution of income, which on the face of it dictates how much money can be directed towards lower wages in case of high wages being capped. It is obviously bold to assume that all wages not paid to high earners will be paid out to lower earners, although the report of course also assumes the state should take care of that also by dictating a higher minimum wage. But where the amateurism of the report really shines through is in the total disregard for any economic consequences of such a wildly draconian policy as government mandates for how much people can earn. The report simply takes it for granted that even if no-one could make more than £100,000 a year, British businesses would continue to be as productive as they are today, and therefore, that the exercise is merely one of redistributing a fixed pie. Reality, of course, would be so very different.
To start with, many businesses would simply be forced to leave these isles, as the inability to attract talent under maximum wage regulation proved devastating to their prospects. Next, with the new, higher minimum wage, apart from all the other problems with a minimum wage, loads of businesses would simply die: you can’t pay low wage employees in hospitality with wages saved from high salary employees in investment banking, unless you propose wild new taxes and subsidies to move money around. Third, with hard work not paying off, the most productive Brits would stop working very much (the most productive are the ones who would see their salaries cut, their previous high salaries remunerating their high productivity).
But none of this is obvious to those of a Marxist persuasion, who believe in a labour theory of value. If you do not believe that wages reflect added value contribution to the production process and you are ignorant of incentives, you can be persuaded that an economy could continue to function even under such authoritarian and destructive a policy a maximum wage regulation. Reality, of course, is that it couldn’t. Despite the seriousness with which the amateurish conclusions in the report are presented and the apparent backing from the British public, government intervention in labour markets are among some of the most destructive polices around. The minimum wage is bad enough; a maximum wage would be catastrophic.