Time for a Maximum Wage

Could a maximum wage gain traction in the United States?

For Republican members of Congress and cable news pundits, a cap on the earnings of the super rich might sound like a dystopian nightmare. Yet, as author Sam Pizzigati argues in his new book, The Case for a Maximum Wage, those who are not ardent free marketeers should give the idea some serious consideration—not only as a desirable policy, but also one that might be more practical than some imagine.

In 2010, trade union leaders presented elites at Davos with a proposal for a ratio-based maximum wage—something proposed in the United States by Amalgamated Transit Union President Larry Hanley. Hanley’s version would mandate that a top executive’s pay be no more than 100 times the salary of the company’s lowest-paid worker. In other words, if the receptionist or janitor makes $35,000 per year, the CEO would take home no more than $3.5 million. To raise his or her pay further, the boss would have to bring up the bottom as well.

While a 100:1 gap comes nowhere close to rigidly enforced equality, it would break from current norms in the United States, where a CEO in one of the country’s largest 350 firms earns an average of 271 times that of a typical worker, according to the Economic Policy Institute.

As Pizzigati—a veteran labor journalist, fellow at the Institute for Policy Studies, and editor of Inequality.org—points out, the Mondragón cooperatives in Spain have implemented much tighter ratios to control the pay of those at the top, to good result. Elsewhere, advocates have won intermediary steps toward a maximum wage. The city of Portland, Oregon, for one, adopted a statute that went into effect this year creating a tax penalty for companies that exceed a 100:1 pay ratio.

Of course, since much of the vast wealth of the super rich comes not from salaries but from stock options and returns on accumulated assets, a maximum wage would address only one aspect of inequality. Yet Pizzigati argues that tackling the “predistribution” of corporate profits by stopping runaway executive pay is nevertheless an important part of keeping the gap from widening further.

Could a maximum wage gain traction more widely in the United States? I spoke with Pizzigati to discuss the nuts and bolts of the idea—and to consider whether such a seemingly radical and egalitarian economic intervention could ever take hold in American politics.

Mark Engler: Part of making the case for a maximum wage is establishing the idea that inequality is actually bad for our society, that it’s truly something we should combat. One counter-argument that comes up is that as long as ordinary working people are making a decent living, we shouldn’t worry about what the rich are doing. In other words, that it’s legitimate to create a floor in the economy, but there shouldn’t be a ceiling. How do you respond to that idea?

Sam Pizzigati: It’s very common, not just on the conservative side of the political fence. It’s essentially the conventional wisdom of the Democratic Party. But it’s deeply flawed. If we let wealth concentrate at the top without limit, we’re undermining our democracy, we’re coarsening our culture, and we’re leaving our economy less stable. If you look historically, we see that the epochs where working people increased their standards of living most significantly correspond to periods where we cared about countering the concentration of wealth.

Engler: You cite Tony Blair’s Secretary of State for Trade and Industry, Peter Mandelson, who said in 1998, “We are intensely relaxed about people getting filthy rich, as long as they pay their taxes.” This notion was part of that Blairite moment.

Pizzigati: That’s right. The corresponding Clintonian notion was that “if there are rats in the basement where poor people are, worry about that. Don’t worry about what’s happening in the penthouse.”

Engler: I think one of the most important concepts you introduce in your book is the idea of linking minimum wages with maximums. Can you talk about that?

Pizzigati: Right now we have an exploitation economy. People of great wealth and power do better, personally, by exploiting people of modest or very little means. The more they downsize and outsource and undercut working people, the more they earn. We need a society where the richest, most powerful among us have a vested interest in improving the well-being of the poorest. We can do that if we link a cap on income at the top to incomes at the bottom—if we create, in a sense, a maximum wage that’s linked to the minimum wage.

Engler: The goal here would be to incentivize companies so the CEO doesn’t make more than, say, ten times the amount of the lowest paid employee?

Pizzigati: Yes. And there can be all sorts of variations on that theme. If corporate executives on average are making over 350 times what workers make, you can put the initial cap at 100 to 1 and start penalizing corporations that exceed that. Then, over time, you could start decreasing the ratio.

Back in the 1960s and 1950s, the typical CEO in the United States of a major corporation took home between twenty and thirty times the pay of the lowest paid worker in their enterprise. Last year, at least twenty-one CEOs in major corporations in the United States made over 1,000 times the income of their lowest paid employee. That means that this worker would have to work more than a millennium to make as much as the CEO makes in one year.

It’s important to note that most Americans have no idea that corporations are paying CEOs at those incredible rates. In fact, when you ask people what you think the appropriate ratio should be, they’ll talk about less than ten to one.

Of course we’re a long way politically from a situation like that. But you can visualize a society where we’d have a 100 percent top marginal tax rate, and we’d set up a system where that top tax rate went into effect at some multiple of the minimum wage. For instance, that twenty-five times the minimum wage becomes the point at which this 100 percent marginal top income tax rate goes into effect. That would be a very easy way of putting in a maximum wage. In fact, Franklin Roosevelt proposed a 100 percent top marginal tax rate back in 1942. We have historical precedent. Something like this is doable. I think it should start to enter our political conversation, and there are steps we can take in the interim that could move us in that direction.

Engler: One idea you talk about is compelling corporations that receive public support—whether government contracts or tax abatements or other subsidies—to link executive pay with the wages of the least paid people in their companies. We sometimes talk about these types of requirements as “public benefits agreements.” And, as it turns out, there are so many companies that are dependent on government contracts or tax breaks that having these mandates would affect a huge portion of the economy.

Pizzigati: Almost every major corporation owes its profit margin, or the health of its profit margin, to either government contracts or government subsidies or tax breaks of one kind or another. One of the most politically promising approaches in our current environment is the idea of leveraging the power of the public purse against excessive CEO pay. We can do that in several ways: We can deny government procurement contracts to corporations that have CEOs making over twenty-five or fifty times what their workers are making. We can deny tax breaks and subsidies to those same corporations. Or we could subject those corporations to a higher tax rate than corporations that have more modest ratios. If we did that, it would have all sorts of positive spin-off effects. We would be encouraging corporations with modest ratios. We would be encouraging co-ops and worker-owned enterprises.

Engler: You mentioned before that, historically, limits on top wages were achieved through progressive income taxes. How do you see a maximum wage as being distinct from just high taxes on the rich?

Pizzigati: In the middle of the twentieth century in the United States—as well as in major countries in Western Europe—we had very high top marginal tax rates. For the twenty years after the Second World War, the top marginal tax rate hovered around 90 percent. It was 91 percent throughout the Eisenhower years in the 1950s. This redistribution through the tax code worked wonders. In the quarter century after the war, the real incomes of average working people more than doubled. There was very little increase at the top over that time.

Those progressive tax rates worked, but they could not be sustained anywhere in the world where they went into effect. In the United States and elsewhere, the rich kept pounding and pounding on the tax code until they got the lower rates and the loopholes they were after. With the collapse of those steep rates at the top, we’ve seen an enormous increase in inequality.

Engler: Why wouldn’t the very rich hammer away at the maximum wage in the same way that they hammered away at the tax code?

Pizzigati: In the tax code, they only have one incentive, which is to get rid of the high tax rates. But if we link the top to the bottom, then the incentives get more complicated. Now executives have another option: they have an incentive to improve the well-being of the people who work for them.

Engler: What are some of the places where this idea of linking minimum and maximum wages has been implemented, and what happened there?

Pizzigati: The most interesting situation is Spain, with the Mondragón network of cooperatives. As part of this Mondragón network there are scores of enterprises, some of them quite large, that operate as cooperatives. At all of these cooperatives there are executives and managers, but the top executive at each of these cooperatives can make no more than six times what the lowest paid worker makes. Mondragón’s network has been very successful; it’s lasted since the 1950s and weathered the 2008 global financial crisis much better than normal corporations did. A key part of the success story is this idea that they are not going to let the gap between executive and workers widen to an atrocious degree.

Engler: In current U.S. politics, this stuff can seem very pie-in-the-sky. Even something like a 100 to 1 ratio would have no chance of actually passing through Congress—particularly with Republicans in control of at least one chamber. What is the value of raising this idea given the very hostile political context?

Pizzigati: Certainly we have a political class that’s hostile to the idea. But we don’t have a public that’s hostile to the idea. The idea that our tax dollars should not go to corporations that that pay their CEOs hundreds of times what they pay their workers: that’s a popular idea. Progressive lawmakers are beginning to understand that—and are beginning to push. In Portland, Oregon, we already have a political jurisdiction that’s gone down the road of what I call the new “pay-ratio politics.” As of 2018, for the first time ever, corporations in Portland that have a higher ratio will pay taxes at a higher rate than corporations with a more modest ratio. Legislation along these lines has been introduced in five states. At the Institute for Policy Studies we have been working with various Senate offices, and we’re fairly confident that in 2019 there will be legislation introduced at the federal level that looks at this in a comprehensive way. There already is legislation pending at the federal level that would tie ratios to corporate tax rates. So we’re not going to get a maximum wage this year, next year, or even in the next few years. But the idea of establishing the principle that we can penalize enterprises that contribute to inequality, that idea, I think, can sell politically.