My UCC colleague, Vittorio Buffachi had an op-ed in the Irish Times yesterday supporting Jeremy Corbyn's proposal of a salary cap to address income inequality. Unlike the critics cited in Vittorio's article, I would not describe Jeremy Corbyn’s proposal as idiotic or lunatic, but neither is it an effective way of addressing the problem of income inequality.
Opposition to the proposal is characterised as a neoliberal response that places the market and incentives above all else. This may be true of some of the ideological opposition, but the most fundamental problem for me with the proposal is that it would be ineffective and inefficient. There are better ways to reduce inequality than implementing and monitoring a pay cap for high earners.
First it's necessary to address one of the arguments in the article, which is that “there is an assumption that inequality between wages is the best way to stimulate productivity, since the prospect of earning a high income is the only incentive behind economic activity”. I think this a bit back to front. Differences in productivity lead to differences in wages. There is little evidence that increases in wages stimulate productivity improvements, and what increases there may be are short-lived.
The assumption in labour markets is that businesses pay individuals more because those individuals can generate more income for the business. For example, we see what appear to be obscene salaries earned by professional footballers, but these are driven by the earning potential of clubs from having these players in their team. Oscar moving to a Chinese club is earning multiples of what he could earn in England. He has not become a better player – in fact he’s probably going to be less effective with poorer team mates – but he will be more productive (based on our narrow and limiting measure of productivity) because the club will generate revenue for more ticket sales, on-field success, and merchandising.
There are complications of course in measuring a worker’s productivity and the extent to which it is attributable to her, and/or the equipment she uses, and/or the combination of her abilities with co-workers. There are also the effects of bargaining power between businesses and workers that can mean workers are ‘underpaid’ where there is, for example, higher unemployment, or ‘overpaid’ where they have specific, highly demanded skills. When it comes to executives of course there is also the problem that their pay tends to set by colleagues on the board of directors, rather than market effects, and we get an insider problem.
Returning to the salary cap, I think it is likely to be ineffective partly because high-earners tend to have more than one source of income, and also have opportunities to structure income in different ways. A base salary is rarely the entire remuneration of executives. A salary cap will simply see an increase in more creative means of payment, such as share options, pension payments, and non-vouched expenses. Monitoring and implementing this becomes an ineffective use of resources. We’ve seen in Ireland how hard it is to monitor and implement salary caps in the health services, banks, the banks' regulator, and universities. The salary cap becomes little more than a symbolic gesture, though this is not to dismiss the importance of symbolic gestures at times.
However, if the real target is income inequality then more effective measures would include the introduction of a basic income for all citizens, which would ensue basic financial security and reduce inequality from the bottom-up rather than the top down. A salary cap would reduce income tax take from high-paid workers, leaving low paid workers in absolute terms either no better off or worse off from less government spending power.
Along with a universal basic income, a wealth tax (as suggested by Picketty) would be far more effective in addressing income inequality – as opposed to wage inequality which is only a subset of income inequality.
I'm an economist so many of these posts will be about economic issues. But since everyone is allowed a view on economics I am inclined to go beyond my profession to throw my tuppence ha'penny into other issues.