Implications of an imposition of a maximum wage.
Definitions: Maximum wage is a legal limit on how much income an individual can earn,
either as a set figure or more likely a multiple of the median salary in a given firm. (Jeremy
Corbny suggested it in 2017.)
Micro Negative:
K = “brain drain”
A = Max wage → removes incentive to work harder to earn higher salaries → encourage
workers to leave UK labour market in search of higher pay → as are highly skilled so
internationally mobile → scarcity of skilled workers in UK → loss of dynamic efficiency in LR
→ causing UK firm to become x-inefficient → ↓productivity same num of workers producing
less output → ↑LR ATC → ↓profits → reduce in finance reinvested in specialist capital
→ ↓Q&Q → ↓share prices → company may enter shut down conditions
A = after Ebola outbreak in Africa in 2014, many Cuban doctors emigrated to Africa due to
↑D for doctors → wages for doctors in Africa higher than in Cuba which has a maximum
wage
Ev =
• Max wage helps bring equity to labour market → reducing Y inequality gap whilst
↑productivity → as large gap between top & bottom wage within firm harms
performance by building up resentment → highest earning workers are often earning
a surplus (economic rent) as impossible to know their MRP
o Dan Price paid all workers wage of $70,000 in his company ‘Gravity
Payments’ → ↑their productivity causing them to grow by 15% per year
• PED & PES of workers in high range is very inelastic → so max wage has little
impact on excess D
• ↑productivity → ↑SNP → more money to invest in specialist capital → ↑in R&D →
↑dynamic efficiency → ↓LRAC
Macro Negative:
K = fall in FDI
A = as companies are making less profits they are less attractive to FDI → ↓I → ↓AD →
leftward shift → output of firm falls as can't afford to produce same Q of gs → need to cut
costs → ↑unemployment → ↓disposable Y nationally → ↓CS → ↓AD → can't afford luxury
gs → ↓LS → ↓inequality → welfare loss → (cyclical nature, less D for gs → ↓em → ↓FDI)
A = Cuba ranks among one of the last countries in the world in terms of the volume of FDI
inflows
Ev =
• Persistently high Y inequality can damage econ growth → max wage can be
beneficial as more equal wage can ↑incentive & productivity
o John Lewis have successfully used share-ownership schemes throughout
their workforce to spread more widely the profits made. This sustains more
consumption and aggregate demand.
• Max wage means CEOs no longer gain surplus wage → cuts costs → > finance
available for employing more workers → ↑employment → ↑disposable Y → gov
spending on benefits↓ as UK workforce has grown → ↑LS → ↓gov spending on
benefits allows gov to spend more on other development indicators (eg. health →
↑LS) or could reduce budget deficit
Definitions: Maximum wage is a legal limit on how much income an individual can earn,
either as a set figure or more likely a multiple of the median salary in a given firm. (Jeremy
Corbny suggested it in 2017.)
Micro Negative:
K = “brain drain”
A = Max wage → removes incentive to work harder to earn higher salaries → encourage
workers to leave UK labour market in search of higher pay → as are highly skilled so
internationally mobile → scarcity of skilled workers in UK → loss of dynamic efficiency in LR
→ causing UK firm to become x-inefficient → ↓productivity same num of workers producing
less output → ↑LR ATC → ↓profits → reduce in finance reinvested in specialist capital
→ ↓Q&Q → ↓share prices → company may enter shut down conditions
A = after Ebola outbreak in Africa in 2014, many Cuban doctors emigrated to Africa due to
↑D for doctors → wages for doctors in Africa higher than in Cuba which has a maximum
wage
Ev =
• Max wage helps bring equity to labour market → reducing Y inequality gap whilst
↑productivity → as large gap between top & bottom wage within firm harms
performance by building up resentment → highest earning workers are often earning
a surplus (economic rent) as impossible to know their MRP
o Dan Price paid all workers wage of $70,000 in his company ‘Gravity
Payments’ → ↑their productivity causing them to grow by 15% per year
• PED & PES of workers in high range is very inelastic → so max wage has little
impact on excess D
• ↑productivity → ↑SNP → more money to invest in specialist capital → ↑in R&D →
↑dynamic efficiency → ↓LRAC
Macro Negative:
K = fall in FDI
A = as companies are making less profits they are less attractive to FDI → ↓I → ↓AD →
leftward shift → output of firm falls as can't afford to produce same Q of gs → need to cut
costs → ↑unemployment → ↓disposable Y nationally → ↓CS → ↓AD → can't afford luxury
gs → ↓LS → ↓inequality → welfare loss → (cyclical nature, less D for gs → ↓em → ↓FDI)
A = Cuba ranks among one of the last countries in the world in terms of the volume of FDI
inflows
Ev =
• Persistently high Y inequality can damage econ growth → max wage can be
beneficial as more equal wage can ↑incentive & productivity
o John Lewis have successfully used share-ownership schemes throughout
their workforce to spread more widely the profits made. This sustains more
consumption and aggregate demand.
• Max wage means CEOs no longer gain surplus wage → cuts costs → > finance
available for employing more workers → ↑employment → ↑disposable Y → gov
spending on benefits↓ as UK workforce has grown → ↑LS → ↓gov spending on
benefits allows gov to spend more on other development indicators (eg. health →
↑LS) or could reduce budget deficit
