The minimum wage has been such a hot topic of debate over the last year or so that journalists and commentators have apparently gotten sick of it and are instead proposing still crazier ideas of ways in which the government can meddle in the economy and ruin everyone’s lives.
The off-the-wall proposal flips the minimum wage debate on its head by proposing just the opposite – a maximum wage!
That’s right, all of our problems are apparently caused by people making too much money. If only we were poorer, everything would be fine. This is obvious nonsense, but for anyone who intuitively feels that CEOs and star athletes make “too much money,” let me address some of the reasons why a maximum wage is a terrible, terrible idea that would make everyone worse off.
Let’s begin with a discussion of how wages are set. People make the mistake of thinking that value comes from how hard you work. It doesn’t. It comes from how many people’s needs a worker can satisfy, and how much consumers subjectively value the service being provided. It may seem unfair that a master craftsman who builds a beautiful piece of furniture gets paid a pittance in comparison to a movie star who makes stupid jokes for millions of dollars, but the furniture can only be used by one person, whereas stupid jokes can be enjoyed by millions of people. Each of them values the joke just a little, much less than they would value a piece of beautiful furniture, but the cumulative value is huge because of their sheer number. Ditto for CEOs and sports stars.
The amount of money they earn is based on the amount of service they provide. It doesn’t seem fair to you because you as an individual don’t value their service all that much, but all customers taken together value them extremely highly.
Wages are also a way for companies to compete for talent, and competition is always a good thing. As an individual, you want employers to be able to compete for your labor by offering you a higher wage. As a company, you want to be able to attract the best talent and high wages are a good way to do that.
Prices are there as a way to allocate scarce resources. When you put a ceiling on a price that is below the market level, you create a shortage where more people want to buy the product than want to sell it. Cap wages of CEOs, and you will have fewer talented CEOs. Cap wages of sports stars, and fewer people will be willing to enter the short, brutal career of a professional athlete. You will end up with buyers who want to hire these people, who want to pay them more, but cannot.
The minimum wage hurts workers who are prevented from finding a job due to the artificial surplus of labor. The maximum wage would hurt consumer, who would be clamoring to flip on ESPN only to find that there are no games on, or at least no games with the kind of star talent they want to see.
Finally, maximum wages would create unforeseeable distortions in the market that could have severe long-term effects. How do we know this? Because it has happened before. During the Great Depression, Franklin Roosevelt instituted wage caps that prevented employers from offering higher wages. Of course, companies still had to find a way to compete for talent, and scarce resources still had to be allocated, so they found another way.
Instead of offering higher wages, companies began offering non-wage “perks,” one of which was employer-provided health insurance. The fact that health insurance became inextricably tied to employment is what led to so many of America’s health care problems in later decades, and is the reason Americans are saddled with ObamaCare today.
Ultimately, the government cannot control the rationing of scarce resources. Price controls only create distortions that are far more destructive than anything the free market is capable of.