In the wake of the banking crisis of 2008, significant press coverage was given to the large salaries, bonuses and pensions being paid to certain individuals in banking and finance, which were seen as being excessively high in relation to both the social worth of those jobs, and to what salary is needed to live a reasonably comfortable life. This echoed common media narratives surrounding the excessive pay of groups such as footballers, lawyers, actors, and singers, especially as compared to jobs that are commonly accepted as having significant social worth, such as nurses and teachers.
This debate requires some clear definitions; a broad definition of salary should be taken (to include pensions, stock options, bonuses etc.) to ensure that a salary cap could not in practice be avoided. Furthermore, it should be clear if entrepreneur's 'salary' (i.e. profits from their companies) should be included; it is suggested that it is included, to ensure proposition's arguments on levels of equality are principally consistent. Finally, the debate is helped if a figure is placed on the maximum salary; the arguments below are not harmed by establishing a maximum salary of $150,000 (with a possibly allowance for a bonus of up to $30,000).
This system would be best implemented by imposing a mandatory 100% tax on all personal income over $150,000, and all bonuses over $30,000. This means that some revenue could still be raised from this if people did continue to pay large salaries and bonuses, although they are unlikely to do so. Furthermore, it would be best implemented through international cooperation, to limit the opportunity of one country to be able to offer higher salaries and poach talented individuals. Countries may agree to this as it prevents a 'race to the top' in salaries, where companies have to offer more and more money to attract the best people.
Some evasion of this is inevitable; figures show $2 trillion of unreported income in the US in 20081. Furthermore, international cooperation is unlikely, as each country has a strong incentive to renege on agreements to attract more talented people to their country.
As a result of having to pay important directors and employees a lower wage, businesses will be able to produce their goods and services for a lower cost, and sell therefore sell them for a lower price. This will lead to a more equitable distribution of wealth, as the poorest will become relatively richer, as prices will fall. This will also be true for small businesses, which will be able to obtain cheaper legal and financial advice and business consultancy, and are therefore more likely to succeed. Sports provide a good example of this. In major league baseball salaries for the players more than doubled in real terms between 1992 and 2002 while ticket prices rose 50%. As players wages take more than 50% of teams revenues a cap would mean a significant cut in costs that could be passed on to the consumer.1
This price-lowering effect is most likely to be felt in those industries where the majority of the costs are in wages; these industries are likely to be service based industries. Individuals, especially poorer individuals, rarely buy services, so the effect on the poorest is likely to be limited.
When wages are better standardized across professions, people are less likely to feel socially pressured into seeking out a higher paid job. As such, they are more likely to choose their job on the basis of other factors, such as how much they enjoy the job, or how ethical the working practices of a company are. This will lead to happier, and hence more productive, employees.
It is equally likely that money is a significant motivator in productivity, and that limiting wages will therefore harm productivity.
Some resources –most notably housing – are very important to large numbers of people, and owning them gives people a great deal of happiness. This policy will limit richer people owning several properties while others live in rented accommodation or smaller houses, as price competition for such properties will be less intense, and poorer people will be better able to compete through savings. Estimates in 2005 suggested there were 6.8million second homes in the USA1.This is a good thing, as it is likely that a person (or family) values their first property more than another person values their second property, known as the law of diminishing marginal returns. This is perhaps the best example of the ways in which inequality leads to worse outcomes for society.
It is likely that foreign demand will displace national demand for properties, especially in key city areas (such as New York or London). Furthermore, having a nice house is one of the strongest incentives to have a job and be a productive tax-paying member of society; loss of this incentive may decrease a society's output level and tax revenue.
Firstly, it limits social tension that may arise due to public dissatisfaction with high wages; see the attacks on the famous banker Sir Fred Goodwin in the UK1. Secondly, people may feel that society recognizes them as being more equal, increasing the perceived self-worth of many, avoiding feelings of inferiority and worry about their social worth, and making them feel closer to other people. See, for example, Sweden, which has the lowest Gini Coefficient (indicating low levels of inequality) in the world, and also some of the highest levels of GDP per capita, life expectancy and literacy rates, and low levels of crime and obesity2. Furthermore, a Forbes report suggests Sweden is one of the happiest countries in the world (along with Denmark, Finland and Norway, 3 other countries with a low Gini Coefficient)3.
Social tensions are greatly exaggerated, and only actually felt when a specific crisis and against a very specific figurehead (in the case of Fred Goodwin, an entirely isolated example, the large amounts of media coverage he received for his role in the banking crisis). Furthermore, feelings of inferiority are typically reasoned away by people, who explain other's greater income in terms of their willingness to work hard, or being lucky. The feeling of superiority over others can be considered a motivator that encourages some people to work (See Opposition Argument One below). Finally, Sweden may be disanalogous as an example as they (and other Scandinavian countries) have a strong collectivist spirit that may be lacking in other countries.
People respond to incentives, and one of the most direct incentives is a financial one. Higher salaries encourage people to deploy their labor. This benefits society by increasing tax revenues that can be spent on redistributive policies; for example, consider the much maligned investment banking profession. It is not uncommon for investment bankers to work 14 to 18 hour days, and to work at weekends; it is unlikely they would do this without the incentive of high salaries and bonuses, at least in the long run. The taxation on financial service providers (that rely on such hard work) and the workers themselves is significant; in 2010 in the UK, it was 11.2% of total tax receipts1. Furthermore, the deployment of labor may lead to more supporting workers being needed and therefore job creation.
The effect of high salaries on levels of labor supply is likely to be marginal. People work in part due to the significant social pressure of having a job and advancing themselves comparatively against others. This motivation will still exist, as there will still be rewards to advancing your career; a salary closer to the salary cap, and the added responsibility and social (or business) standing such advancement provides. While there may be fewer people willing to work 18 hour days, 6 days a week, this work is being done because it is valuable – so the firm will need to employ more people to do it, and the work is spread over a larger number of people, possibly even increasing employment
Many industries, especially at the highest paying end, rely on people of various nationalities. This is especially true in places seen to be financial centers of the world, such as New York, London and Tokyo – for example, 175,000 professional or managerial roles were given to immigrants in the UK in 20041. When a policy such as this is instigated, many people will leave to other countries that do not have such a limit, especially if they are initially from another country. Furthermore, it will be difficult for a country to attract talent while this policy is in effect, as the significant difficulty moving country involves, such as leaving friends and family behind, cannot be compensated for by a higher income.
The significant difficulty of moving country, such as leaving behind friends and family, and leaving behind an area (or even language) you know well, are likely to limit emigration. As for immigration, the skill set is typically already within the country; if not, this policy may encourage a focus on an educational system to ensure it is. Finally, if the argumentation about equality leading to a better and happier society is correct, this in itself will attract immigrants to high-paying jobs.
Some jobs are extremely difficult or unpleasant. Consider a doctor, who trains for many years, often unpaid, in order to do their job – and the average doctor’s salary in the USA is close to the proposed cap, and surpasses it with merely 5 years experience1. Or consider a sewage worker or firefighter, whose job is one that many people would not want to do. High salaries are a good way of encouraging people to do these jobs; limiting the ability to pay high salaries will mean that some vital roles may be less appealing, and the job will not be done.
There is still significant social prestige to being a doctor that will motivate people to take up the role; the same will be true for other high-paid jobs where there is a lot of training, such as lawyers. This prestige is often a key part of the reason people do the job in the first place; many doctors are paid far less than people working in business or financial services at similar levels of seniority. Finally, the unpleasant jobs mentioned typically are done for a salary well below the cap proposed, and they still have adequate people.
Many entrepreneurs are driven by profit. This is the reason that people take out large loans from banks, often with their home as security, and use it to set up a business; the hope of profit and a better life. Without that incentive, the risk has a far lower reward, and therefore will appear to be not worth it. Entrepreneurs not only give others jobs, but stimulate the economy with new ideas and business practices that can spill over into other areas of the economy. Even within businesses that are already established, this policy will be problematic. For example, why would researchers at a pharmaceutical company try to develop a new drug if they realize they can't financially benefit from it? GlaxoSmithKline spent over $6bn dollars on research in 2010 alone1. This policy could limit such research into the type of technology (or medicine) that advances society.
Under this policy, companies will not be able to spend their profits on inflating their salaries, and so are more likely to have a long-term outlook to the company. The best way to advance long-term interests is through research; it is possible that all their excess profit will be spent on this. While entrepreneurs may be driven by profit, the salary proposed is sufficiently high that it can be aspired to; most entrepreneurs will still be motivated by it, as they seldom already have a job that already pays so much.
BBC News Website, 25th March 2009, http://news.bbc.co.uk/1/hi/7962825.stm
CIA World Factbook, 20th July 2011, https://www.cia.gov/library/publications/the-world-factbook/geos/sw.html
Forbes, "The World's Happiest Countries", July 14th 2010, http://www.forbes.com/2010/07/14/world-happiest-countries-lifestyle-real...
Michael J. Haupert, "The Economic History of Major League Baseball", EH.net Encyclopedia, December 3rd 2007, http://eh.net/encyclopedia/article/haupert.mlb
E. Belsky, "Multiple-Home Ownership and the Income Elasticity of Housing Demand", October 2006, http://www.jchs.harvard.edu/publications/homeownership/w06-5.pdf
E. Feige, "America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S", January 2011, http://ideas.repec.org/p/pra/mprapa/29672.html
PWC, "The Total Tax Contribution of UK Financial Services", December 2010, http://188.8.131.52/NR/rdonlyres/68F49A7E-8255-415B-99A8-1A8273D568D9...
Payscale, "Salary for People with Jobs as Physicians/Doctors", July 2011, http://www.payscale.com/research/US/People_with_Jobs_as_Physicians_%2F_D...
FierceBiotech, "GlaxoSmithKline: The World's Biggest R+D Spenders", March 2011, http://www.fiercebiotech.com/special-reports/worlds-biggest-rd-spenders/...
John Salt and Jane Millar, Office of National Statistics "Foreign Labour in the United Kingdom: current patterns and trends", October 2006, http://www.statistics.gov.uk/articles/labour_market_trends/foreign_labou...