U.K. Labour Leader Jeremy Corbyn caused a stir in Britain earlier week when he called for a maximum wage for the country’s highest earners in an effort to change a “grossly unequal” economy.
Corbyn was short on details when he made the remarks during an interview with BBC radio, but said something was needed to fight the growing inequality in the U.K.
“I can’t put a figure on it and I don’t want to at the moment. The point I’m trying to make is that we have the worst levels of income disparity of most of the OECD countries,” the labour leader told BBC Radio 4’s Today program. “It is getting worse. And corporate taxation is a part of it. If we want to live in a more egalitarian society, and fund our public services, we cannot go on creating worse levels of inequality.”
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Corbyn later backed down on the idea of a nationwide pay cap but said under his proposal companies seeking government contracts would have to limit executives from earning more than 20 times the wage of their lowest paid worker, according to the Guardian. He calculated the salary limit would work out to about £350,000 or roughly C$489,000.
Could a national maximum wage work?
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While Corbyn was widely criticized for his maximum wage comments the idea is not without historical precedent.
Alex Hemingway, a public finance policy analyst with the left-leaning think tank Canadian Centre for Policy Alternatives (CCPA), says there are many programs that could work under a maximum wage or pay cap.
Hemingway points to U.S. President Franklin D. Roosevelt, who in 1942, proposed that anyone earning over $25,000 should be taxed at 100 per cent, effectively calling for a cap on high earners,
He adds that Corbyn’s plan could work in Canada where the federal government could use purchasing power to shrink the wage gap between executives and average workers.
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A report from the CCPA released earlier this month estimates the average compensation of the Top 100 chief executives in Canada was $9.5 million in 2015 – roughly 193 times the average annual wage.
“We are often told we can’t do anything about it, that we can’t tackle this extraordinary level of inequality, but there is actually a lot we can do,” he said. “Bringing in constraints on pay gaps is one of those measures.”
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He adds that raising the minimum wage, cracking down on tax havens, and changing the way we tax stock options are ways of closing the pay gap. Prime Minister Justin Trudeau said his government will look at closing tax loopholes for the rich in the upcoming federal budget while speaking at a town hall in Kingston, Ont. on the first day of his cross-country road trip to connect with Canadians.
How are CEOs paid?
William Watson, a professor of economics at McGill University, said western societies have done well with minimum regulation of wages and any legislation around a maximum wage would “create strange and perverse incentives.”
“As soon as you start regulating wages clever tax lawyers and other lawyers would devise ways of compensating people that fell outside of whatever your rules were. A lot of smart people would go into the business of figuring out how to pay top end people without these rules.”
Watson who wrote the book The Inequality Trap: Fighting Capitalism Instead of Poverty argues that capitalism has in fact lifted millions out of poverty.
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He adds that a country could lose top-tier talent if wage caps are introduced.
“If Canada, for instance, did this and the United States didn’t, people in our top one per cent would find the U.S. more attractive,” Watson said.
Frances Woolley, professor of economics at Carleton University, said past attempts to reign in CEO pay haven’t been effective. Salary disclosure, for example, was actually meant to lower pay among executives but had the opposite effect.
“What happened was all the CEOs looked at how much the other CEOs were getting paid and said ‘well I want to get paid more than my colleagues’,” she said.
Woolley said maximum wage legislation could allow for companies to “game” the system by contracting out the lowest paid jobs.
“CEO pay is very much an arms race,” Woolley said. “If you look at CEO retention it is not how much you’re paying the CEO in absolute terms but how much you’re paying them relative to other CEOs.”
“If everybody thinks like that the CEO pay spirals out of control.”
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