Minimum Wage and Maximum Salary

The opposite to Mimimum Wage is Maximum Salary, and this has hardly been explored, but makes some sense. Another aspect of mimimum wage laws is the long-term aspects, which also seem to be largely ignored.

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By “Minimum Wage” we refer to the possible implementation of laws which set a floor on the hourly wage which may be paid to anyone within the jurisdiction of the law-writing organization. Any wage-paying organization can institute a minimum wage for all employees of the organization, and that is an implicit fact for any organization, when it sets its salary structure. Minimum wage becomes more noteworthy when it is a government organization which sets the wage and it has the power to demand that any wage-paying organization within its geographic boundaries will have to set their own organizational minimum wage to no lower than some floor.

These laws do not typically relate to the minimum number of hours per month that the wage-paying organization must give their wage-earners, so the actual amounts received by wage-earners do not rise proportionally to the minimum wage floor. There are some standard arguments which are made in opposition to the installation of a minimum wage or to the increase in the level chosen for that minimum wage. The first argument is that it will simply raise prices, so the consumers will suffer from any hike in minimum wage. The second argument is that it will lead to a reduction in hours worked, so employees affected by a rise in minimum wage levels will not benefit much from the rise. The third argument is that it will reduce the profitability of the organizations subject to the minimum wage rise. The fourth argument is that it will lead to unemployment of some of those subject to the minimum wage, either from an increase in workload for those remaining or from more automation or other productivity changes to reduce the need for the labor of those working at the minimum wage. The fifth argument is that the minimum wage law will drive customers for those organizations paying it to regions where it does not apply. All of these and others have standard elaborations, as well as standard counters and rebuttals. However, first let us apply these arguments opposing a minimum wage to the inverse situation, that of a maximum salary.

A maximum salary law is the analog of a minimum wage floor, but on the other end of the remuneration scale. It says that no one should be paid more than some roof amount per month. Again, this rule is used implicitly by every organization, as it sets the salary for the highest paid individual within the organization. Maximum salary, like minimum wage, becomes noteworthy when it is applied by a government organization for all salary-paying organizations within its jurisdiction.

The amount of money involved can be much greater with a maximum salary law than a minimum wage law. The reason is that the salaries of other employees are scaled to the maximum salary paid. Let’s do a numeric example to illustrate. Suppose there is a large corporation, with a top executive, and on each level of the hierarchy, the individual has n subordinates. Each of the n subordinates has n subordinates as well. The top executive gets a salary of T, and each step down in the hierarchy has a reduction of a factor of r in salary, so the second level gets Tr and the third level Tr2, the third Tr3, and so on. With j levels of hierarchy, the total salary paid is simply a geometric series, amounting to T[(nr)j -1)/(nr-1)]. Suppose the corporation has 8 levels, the top salary is 100 times the national average salary, S, and there are 7 subordinates for each individual higher than the lowest level, and the ratio r of salary from level to level is 70%. Then the total labor cost is about 8.5 million times S. American large corporations have a ratio such as 100 or 200 or 1000 or some such large figure. If we compare this with a country like Japan, where for decades following the second world war the top salary was a single digit, like 7, times the national average, the total labor cost drops to 0.6 million times S. The ratio is simply 100 to 7, of course. But this example demonstrates that high top salaries can make an extraordinary difference in total labor costs, dwarfing anything that a minimum wage could do by factors of a hundred or a thousand.

The same arguments that are typically used against a hike in the minimum wage can be used in favor of reducing the maximum salary. First, there will be a large reduction in the cost to consumers with a reduction in minimum salary. Second, the money released can be used to increase employment at the lower levels, resulting in individuals who were on wages and part-time being employed for more hours per week. Third, it will vastly increase the profitability of the salary-paying organizations who are affected by the change. Fourth, it will allow more people to be employed at levels near the lower one, as there is a tremendous amount of money freed up by this maximum salary reduction. Fifth, it will draw customers in from areas where there is no or a higher maximum salary, leading to an improvement in the profitability of organizations, corporations, companies or partnerships, which are subject to the maximum salary.

One could translate the elaborations of arguments in favor of minimum wage over to the analogous case of maximum salary. One could also translate the counter-arguments opposing minimum wage over to maximum salary. The arguments, however, in favor of a minimum wage would be opposed to a maximum salary, and those opposed to a minimum wage would turn out to be in support of a maximum salary. Thus, if there were a location where both should be considered, they should not be part of a package together, as those supporting one would necessarily, if they were logical rather than emotional, oppose the other.

It is somewhat difficult to actually formulate such laws, as there are many ways that devious organizations could use to outflank them, and actually pay less than the minimum wage or more than the maximum salary. There is little need to try and formulate one of them, as that would only have use if a political jurisdiction were actually contemplating such a law; the laws could be done, and there would have to be some political follow-up to find out how organizations were evading them; this is much like what the tax-collecting organizations must do in situations were tax evasion becomes common and some revision of laws is necessary to take the mechanisms of evasion into account and defuse them. This is an on-going necessity for financial law enforcement of all types, but is not relevant to the questions posed here, which simply illustrate the complementary law has the inverse of support.

It might be noted that the five arguments listed here for and against such laws are based upon predicted short-term effects and proponents typically ignore long-term, but more important, effects. For example, consider the argument that installing a minimum wage law will produce unemployment among low-wage-earners. An organization who hires at the minimum wage might have to reduce employment rather abruptly, as its costs would jump up on the day that the minimum wage law went into effect. In order to maintain its ability to pay expenses, it might very well be forced to lay off some low-wage earners. It might also raise prices and take other expedients, but one very possible scenario is the lay-off. What happens to someone who is laid off? This is a longer-term question.

Because the minimum wage is instituted in a jurisdiction, there might be fewer opportunities for a person suffering such a lay-off. One alternative is to emigrate to a different area where there were low-wage job opportunities. Emigration is a large step for some people, who might have all sorts of different ties to the area where they were formerly working. Some might be quite mobile, and others might be hardly mobile at all. Mobility comes at a cost, and low-wage-earners might be the least mobile of any group of employees, as the costs to migrate bar them from seeking this solution to their law-induced unemployment.

Another alternative is that they become frustrated, and decide to seek education so that they will no longer be only capable of employment at the lowest wage. There are people who have avoided gaining such education, for various reasons, ranging from their childhood experience at home or in school, their previous attempts at enrolling in some educational program, or peer pressure. The lay-off they suffer may be sufficient to overcome these reasons for hesitation. One might some some fraction would turn to education, while others would not. What this means is that some portion of those suffering unemployment would seek to improve their proficiency or breadth of knowledge, and then later enter the workforce again, at a higher level and with more capability. Overall, the minimum wage might be said to have improved the average capability of the workforce over some time period following its installation. So, the jurisdiction that instituted it might see a reduction in demands for assistance and an increase in taxation, owing solely to the pressure for better education that some portion of the newly unemployed low-wage-earners experienced. Does this exceed any losses the jurisdiction might have suffered from an increase in demand for assistance? Perhaps and perhaps not, but this is a long-term effect and cannot be simply measured. So, it might be argued that there are short-term disadvantages to a minimum wage but potential long-term advantages.