Could We Ever See a Maximum Wage in the U.S.?

Source: Thinkstock

Source: Thinkstock

Inequality — especially when it comes to income — is one of the most important and talked-about aspects of the American economy today. As a nation, the United States has entered a phase unlike any it has seen in a long time. The ranks of the poor are swollen, putting stress on many of the country’s safety nets and charities. Wages are stagnant, and jobs, although up in quantity, have taken a nosedive in quality. The middle class is in dire straights, and traditional ladders out of poverty — like education — have become so expensive that they are arguably not worth it.

One mechanism that has been used by society to help curb the rift between the poor and the rich is the minimum wage, which has been in use for a long time now. There are several different levels of the minimum wage across the country, as states and cities are able to implement their own rules regarding it. Cities like Seattle have taken it upon themselves to clear the way for the nation’s highest, at $15 per hour to be phased in over the next several years. Still other places simply default the national minimum wage of $7.25 per hour, the lowest allowed by federal law.

There are even rules that allow employers to pay even less than than that to tipped employees, who can make between two or three dollars per hour, with the rest of their income subsidized by tips from customers or other gratuities.

Since the minimum wage has become a mainstay in our society — despite the calls for it to be abolished by some free-market advocates — another question looms in the distance given the increasing rift in income inequality. What about a maximum wage? Now, that concept immediately inspires a knee-jerk reaction, but it is something that should be explored from an economic standpoint, as well as a cultural one.

So, is the idea of a maximum wage — a cap on the earnings an individual can earn in a given period of time — as completely ludicrous as it sounds? The answer is yes, particularly to Americans, who have been described as a nation of “temporarily embarrassed millionaires,” by John Steinbeck.

Source: The Economist

Source: The Economist

Monetary gain and increased social standing have always been the primary motivators in any given society or economy, and a maximum wage puts that whole paradigm in danger. Yes, it is true that there are people out there who make entirely too much money — given the actual value they return to society. The argument can be made that stock traders and other finance professionals simply don’t produce anything, they merely move money around and collect a fee for doing so.

This doesn’t actually contribute anything to the economy; it’s merely a way of becoming a middle man and finding a way to profit. Naturally, this brings to mind quotes from stevedore leader Frank Sobotka during season two of HBO’s The Wire, in which the character, played by actor Chris Bauer, laments on how American industry has shifted away from manufacturing and toward a more service-based economy.

It’s in Sobotka’s diatribe that we get to the heart of the issue when it comes to a maximum wage: American ideals. Americans don’t like to be told what to do, for the most part, and they certainly don’t like the idea that they are restrained. After all, the U.S. is billed as the ‘home of the free,’ and that would instinctively be applied to the amount of money one could make as well.

The issue, however, lies in just how stacked the level of inequality has become. Those at the top are on track to have so much more than everyone else — that sooner or later, something will break. Whether that ends in civil unrest and revolution, as seen with the protests of Occupy Wall Street, or the crime starts to increase as people simply start to take what they need instead of paying for it, the outcome is not a good one unless a solution can be found.

A look at the chart above from The Economist shows just how dramatic the levels have changed, particularly over the past decade or so. Many people don’t see a problem there, but there is one. Once the padding of the middle class has eroded down to nothing, there will be little stopping those on the bottom from making some serious noise regarding the issue.

Tax Rates over time

Source: Aspen Grove Investments

So, about that maximum wage. Is it really feasible? Sure, it’s an idea that can be talked about and kicked back and forth by economists, but is it really something that would actually help?

First of all, it’s not a completely foreign concept to the American lexicon, as most people are aware of how salary caps work in professional sports leagues. Some leagues, like the NBA, even have maximum salary levels in place through the collective bargaining agreement with the player’s union.

These ideas are easy enough to understand for many people, and it’s the same concept that we see here, being applied across the business spectrum when we’re talking about implementing a maximum wage. Imagine placing a salary cap of sorts on one of the nation’s biggest corporations — GE, for example. Essentially, there would be a set amount of money the company could use to pay employees for the course of a year, and they would be responsible for divvying up that money to the employees they saw fit. It’s not that outlandish, and many shareholders might actually like the idea.

Not only that, but Vox points out the fact that within certain taxation structures, America sort of had a maximum wage at one point in our history. Around the time of the second World War, the top marginal tax rate shot all the way up to 90%. By applying such a heavy tax burden on top earners, it essentially made it futile to try and pay, say, top executives obscene amounts of money. This could be seen as a good or bad thing, but it does make for an interesting case study.

But just try to imagine the same kind of situation these days. Already, we have companies and top earners complaining endlessly about how their taxes are too high and that they are the true victims of the sluggish economy. Seriously, how many of the country’s highest class would suddenly decide to become Irish or Bahamian if the mere discussion of a 90% tax rate was brought up in Congress? The chart above, from Aspen Grove Investments, shows where we are now in relation to historical tax rates, and things don’t seem so bad.

The true problem with incredibly vast levels of inequality is that it can threaten the very foundation of our country. These issues stem from money having so much influence over our political system, that the poor really have no leverage whatsoever. A maximum wage is a drastic action, and one that almost nobody will take kindly to or be willing to adopt, particularly here in America. But it is something that should be brought into the discussion.

There are talks happening regarding a maximum wage and finding ways to lessen the rift between the haves and the have-nots, but so far, things have stalled. An op-ed from CNN has taken the issue to heart, and even examined efforts in Switzerland to reduce the level of inequality within its own country. Arguing from a moral position rather than an economic one, Swiss politician Cedric Wermuth sees inequality as a real problem, and one that needs to be solved sooner rather than later.

“There is a certain threat to democracy,” Wermuth bluntly puts it.

Is there any real hope of pushing a maximum wage policy into place in the United States? It’s extremely unlikely. The concept itself seems so contrarian — and, simply put, anti-American — that there is little reason to believe it could ever be taken seriously in the U.S. But that shouldn’t stop economists and politicians from raising the idea into discussion. Executive pay is out of control, and the minimum wage issue needs to be continually addressed if America wants to hold itself apart in the long run.

There are plenty of reasons to be for the idea, and plenty of reasons to be against it. But for the few proponents of a maximum wage, the battle may be as steep an uphill fight as you could ever find in the United States.

Follow Sam on Twitter @Sliceofginger

More from Business Cheat Sheet: