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What Is a Maximum Wage?

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  • Written By: Terry Masters
  • Edited By: Shereen Skola
  • Last Modified Date: 20 November 2016
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A maximum wage is a legal cap on the amount of money an individual can make as salary. It is an economic concept that is designed to combat income inequality and inflation. The notion of a maximum wage is functionally related to a minimum wage, which is the lowest hourly wage that employers can pay employees under the law. While minimum wage law is common in most major economies to protect the country's standard of living, maximum wage law has yet to be widely implemented in countries that embrace capitalism.

Income inequality is an issue that governments grapple with as a part of a social welfare agenda. When the disparity between what the lowest wage earners make and the highest earners make becomes too severe, it thrusts a society into a two-tier structure. There are poor people and rich people, and a shrinking of the “middle class.” This type of economic development is ripe for social unrest.

For example, in the US, some corporations pay their chief executive officers (CEOs) as much as 300 times the wages of their lowest paid workers. Many economists promote a wage disparity at the highest levels of no more than 25 times the lowest paid workers. Some experts believe that the growing wage disparity is part of the root of corporate corruption, market busts, economic downturns and higher inflation.

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In countries with economies based on capitalism, it is difficult to promote a scheme that would limit a person's ability to earn as much as he is able. Such a proposal can seem, on its face, to be anti-capitalistic and against the values of a free-market system. Government proposals that seem based on notions of sharing the wealth often get tagged with the “socialist” label. Instead, politicians occasionally make maximum wage proposals to cap the income of certain segments of society, such as CEOs of major corporations. For example, a country's government may bail out a particular industry, such as the banking industry, and float the idea of capping the salaries of that industry's executives as a consequence of accepting public money.

Although maximum wage law is not a favored approach in most free-market countries, it has been successfully proposed in countries that follow a more socialistic model. Venezuela, for example, put a maximum wage law into effect for government workers. It mandated that public salaries could not be more than a certain percentage higher than the minimum wage.

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