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Could a national maximum wage work?

Ruth Tarrant

11th January 2017

On Tuesday's Today programme, Jeremy Corbyn suggested that introducing "maximum pay" would be an effective way of reducing inequality and tackling the issue of overly-high pay in the boardroom (see this BBC video report on Fatcat Wednesday)

This article from the BBC explores some of the reasons why a legal limit on pay would be unlikely to work, not least of all because boardroom pay can take many forms, including salaries, dividends, share options and so on. Furthermore, in a global economy, top executives might simply choose to work in countries where there are no limits, or devise ever-more imaginative ways of evading tax (you could consider the Laffer curve here).

Possible alternatives that have been suggested include legal restrictions on the ratio between top and bottom earners in an organisation, and higher marginal tax rates for the rich. Or, supply side policies that would boost the productivity and earnings-potential of the poor may be a solution, albeit one that would take longer to have an effect.

Some of the responses to Corbyn's musings have been quite interesting, and rather blunt. Edwin Morgan, from the Institute of Directors, agreed that firms should listen to public and political concerns and "moderate" their pay awards but went on to say that maximum pay laws would be a "blunt tool". The economist Danny Blanchflower said it was "totally idiotic, unworkable" idea, and the economist Richard Murphy said it made "no economic sense".

Ruth Tarrant

Ruth has been Subject Lead in Economics at tutor2u for many years after a career of teaching Economics, Business, Politics and Maths in a range of secondary schools. She is a highly experienced A level Economics Examiner, and also teaches undergraduate Economics on a very part-time basis at the University of Oxford. Ruth is passionate about making economics fun, engaging and accessible.

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