A friend of mine proposed the idea that salaries in firms should be limited in a 1:2.5 ratio, that no employee should be legally allowed to be paid more than 2.5 times the least paid member. He proposes it as a solution to cronyism within my country’s economic circles, where people hold shares in each others companies and appoint each other to lucrative executive positions.
I’ve argued that the sectors of the economy with the most cronyism are the most regulated ones (utilities, oil, banking, airlines etc.), but I feel that doesn’t quite go to the root of the problem. What would be the economic consequences of this legislation? Would it result in a reverse of the normal paradigm of unemployment artificially high wage rates create?
He is skeptical that potential employees would move to freer countries, for reasons I am unclear of.
I think you need to explain to him that having no money to earn is a little worse than having less money to earn.
Heavily regulated and unionised corporations will very much have people earning very high and uniform wages. However, it is at the expense of thousands of other potential applicants for jobs inside those corporations, who don’t get those jobs, because they have been shut out from organisations by not being able to work there at wages those organisations would have been willing to hire them for. It allows people on the inside looking out to practice heavy favouritism over people on the outside looking in - even if that favouritism is not practiced between them on the inside.
Such is thus the highest form of cronyism. As opposed to a situation where thousands more could get jobs for useful work in the organisation, albeit being paid far less than those at the top who favour family and friends, we would have a situation where a small group of unionised or regulatorilly benefitted people start monopolizing and hoarding job positions in all such corporations. It would be a situation where only the cronies would be working at in all corporations and nobody else.
It would create hyper-employment (don’t know if that’s a technical term in economics, but I like it so I’m going to use it [:)])… this might sound good but it’s not. Unemployment is caused by wage price floors (minimum wage) and hyper-emploment is caused by wage price caps. If the price of anything is capped, supply is reduced and demand is increased beyond the levels that would otherwise obtain. This means that there will be too few employs (labor supply) and too much employment (labor demand). There will be lots of unfilled jobs, especially jobs for skilled workers. Yes, the skilled workers will either leave or find other means of compensation. During WWII, the US gov’t capped monetary wages, so employers offered health benefits instead. The market would find similar sorts of “workarounds” for the 1:2.5 limit, perhaps offering a Christmas turkey and lots of paid vacation time or reduced duties or free rent or whatever.
One need only look to South Africa to see a similar effect. It’s called “Black Economic Empowerment”, or BEE. Basically, it’s affirmative action, but the reality is more like cronyism dressed up in political correctness.
It was supposed to jumpstart blacks and other “previously disadvantaged” people into high-skill, high-paying positions by putting racial quotas on companies with threats of fines if the regulations were not abided by. Problem was, the supply of these magical jumpstarters was non-existant outside of the government’s small corporate clique of pals. What ended up happening was the favored, and already quite wealthy, black executives ended up being executives to dozens of companies simultaneously. So much for the “empowerment” part.
Now South Africa has endured two decades worth of a “brain drain” as the skilled workers able to fill the needy positions had the misfortune of being white and left for greener pastures abroad.
This causes their stock to go down, and intiates the buy-out market. Financial groups and/or competitors will buy out the corporation and fire the frat kids pulling this sh*t.
This doesn’t happen much anymore because of anti trust legislation against consolidation of the market and leveraged buyouts. Before this legislation, buyouts used to happen all the time, and always, always to the benefit of the consumer. Slashing prices and increasing output.
The few companies that did try to cartelize the market only succeeded in buying out their contemporary competitors. New businesses quickly arose to compete with the conglomerate. If the free market is so easy for rich people to control, why do they need the government?
So… if a CEO only gets paid 2.5*30,000 = 85k/yr, then everyone else has to get paid somewhere in between. I think a lot of snr engineers would tell you to kiss their asses if they got paid only like 50k/yr. Especially because foreign companies already outbid even that.
Also, socialism is already possible in the free market. Just get your buds together and pool your resources under an egalitarian contract. Its just that, for reasons the Austrian School illuminates, socialism completely fails when placed in competition with the capitalist mode of production. This is why socialism has to come about through government, because you can’t get Atlas to consent to it.
would one expect the price of something else to rise too? I mean the forgone money/goods has to go somewhere?
if the regulated industry is important to the economy too, there is a chance that it isn’t getting enough funds so that could mean a restriction of the whole economy itself.
Just propose back a ratio of 1:1 and see how he defends his 1:2.5 ratio against it. Then tell him to use those very same arguments in defending a market-derived ratio against his 1:2.5 proposal. He can do it all by himself.
The basic idea behind the salary regulation your friend proposed is to raise the salaries/wages of the people who are not well connected relative to the ones that are well connected. Is that correct? If so, then my take on it is that once the government starts to regulate wages (otherwise known as price levels), the information carried in those prices is muddled or even eliminated. As such, it becomes increasingly difficult for entrepreneurs (including wage earners) to perform economic calculations and everyone, including and particularly wage earners, will suffer.
