Jeremy Corbyn's maximum wage plan would be a disaster

A cap on earnings would be bad for the economy - and have little impact on inequality.

by Jack Torrance
Last Updated: 10 Jan 2017

So this is Jeremy Corbyn in full ‘Donald Trump mode’. In the hope of reversing his party’s massive decline in popularity, the Labour leader is attempting to ape the no holds barred style that won November’s election across the pond. Instead of Mexico and China, Corbyn’s populist target of choice is the business elite – and footballers – who he says are paid too much.

On the Today programme this morning he said he ‘would like to see some kind of maximum earnings limit’. Though it doesn’t seem to be official party policy just yet, Corbyn said he was looking at ‘the inequality of the grotesque levels of difference between the average wages paid in our society and the telephone number salaries paid at the top of it.’ Corbyn neglected to say whether he had a particular level in mind, except that it would be higher than the £138,000 he earns.

That Corbyn and the Labour party are concerned about equality isn’t remarkable. There are big gaps between the richest and poorest, which makes it harder for us to have a cohesive society. Even from a ruthlessly capitalist viewpoint, if workers don’t feel like they have a stake in the world they live in then they are hardly going to feel incentivised to be productive. This could have something to do with our stubbornly bottom-of-the-table productivity figures here in the UK.

Tackling this inequality is not a bad idea in itself. But Corbyn’s proposed solution is absurdly simplistic and would cause a great many more economic problems than it would solve. For a start there’s the well-worn argument about scaring off the brightest and best. UK Plc remains a magnet for the cream of the global business crop. But faced with a cap on earnings it’s extremely likely that the internationally mobile business elite would decide that New York, Singapore or even in Paris is a better bet than the UK.

Of course people choose where to live and work based on more than their salary. But at a time when Britain needs to be demonstrating its openness to the world and its appetite for inward investment, this would send a disastrously wrong message.

It’s not clear whether such a cap would extend to capital gains, either. If it didn’t, it would be ineffective in combating inequality; many of society’s richest owe their wealth to investment (especially in property) or the sale of their own businesses. Cast your eye along the upper echelons of the Sunday Times Rich List and you’ll find few who are there because they earned a high salary. Sir Martin Sorrell, the FTSE 100’s highest-paid boss, is way down in 288th.

On the other hand if capital gains were included in the cap, that would be even worse, at a stroke massively disincentivising entrepreneurship and penalising those who may have worked for little or no salary, when the time comes to sell their creation. It would also deter inward investment as those high net-worths that presently decide to make Britain their home (oiling the wheels of the economy in the process) would surely head elsewhere else less doctrinaire about how rich they were allowed to be.

With their salaries available for the public to see, the CEOs of listed companies are an easy target, but making them poorer will make our economy less competitive while doing little to actually address inequality.

Bur however bad it may be as economics, that doesn’t mean it’s bad politics. A YouGov poll found that 44% of people would oppose a £1m cap on salaries, but 39% of people said they liked the idea (the current government won the last election with just 36% of the vote).

Corbyn’s words have certainly generated a lot of media coverage. Most of it has been negative but as we saw in the states, that’s not always a bad thing. Expect more unworkable, attention-grabbing policies from Corbyn in the near-future. Free iPhones for every voter, Jeremy?

Update: In his speech this afternoon Corbyn proposed capping the pay of bosses whose firms have a government contract at 20 times that of their lowest paid worker, which would likely work out as £350,000. That would be bad news for the CEOs of outsourcing firms Serco, G4S and Mitie, who all made 7 figures last year. 

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