Business

Corbyn’s ‘maximum wage’ is economic madness

Superficially attractive, a maximum wage may allow Labour to virtue-signal, but it won't work

BY Kristian Niemietz   /  10 January 2017




The interesting thing about the Corbyn phenomenon is that while neither his personal nor his party’s poll ratings suggest that Britain is on the verge of a socialist revolution, a lot of his individual policies are hugely popular. Surveys have repeatedly shown that at least two thirds of the electorate support a renationalisation of energy companies, railways and postal services, as well as price controls for gas, electricity, transport and rents. More than a third want the full Venezuela model, with politicians setting grocery prices. There are majorities for raising the minimum wage to at least £10, and the top rate of income tax to at least 60%.

Corbyn’s latest proposal for a ‘maximum wage’ could become another one of those policies. It is a policy which is wonderfully easy to justify in interviews and Question Time-style debates, because it practically cries out for a display of the cheap moralism that the left does so well. (“Why does anyone need to earn 130 times as much as an average-paid employee? At a time when so many ordinary families are struggling?”) It has the potential of becoming a signal policy, a policy that is not really meant to produce any particular outcome, but to signal the right instincts and intentions.

But what would the effect of a maximum wage be? There is no empirical evidence on such a policy per se, because there are no suitable precedents. But we could think of it as an implicit top marginal tax rate of 100%, and then look at the literature on the effect of those rates.

What do football superstars and top-level researchers have in common? It is the fact that both have been shown to be responsive to tax rates when deciding where to live and work, and so have many other high-earning professions. These people obviously respond to many other factors, financial and non-financial, as well: low taxes alone are not enough to attract anyone. But when a number of places are otherwise similarly attractive, it is the tax rate that tips the scale. Emigration is, of course, only one possible response to excessive taxation. There are many others, such as reducing one’s work efforts, redirecting them into less productive avenues, retiring earlier etc.

The effect of a maximum wage on aggregate measures of inequality would not be huge. There are not nearly as many super-rich people in the UK as the Corbynistas seem to think there are: only about a third of a million people earn more than £150,000. In practice, companies competing for top talent will probably simply change the composition of the remuneration package, away from components that count towards the cap, and towards components that don’t. Top-earners will receive indirect, expensive perks, and in response, Corbyn’s government will have to create an extensive enforcement bureaucracy. But then again, this would probably happen anyway, given that a Corbyn government would be all about increasing state control over economic life.

Dr Kristian Niemietz is Head of Health and Welfare at the Institute of Economic Affairs.