The Maximum Wage Law

The United States enacted its minimum wage law in 1938. It didn’t cover all workers, and still doesn’t, but establishes a policy that in some cases government should abridge people’s freedom of contract to mandate a wage different from the one people might agree upon. The “principle” appears to be that some wage levels are too unfairly low to be allowable, even if the employee and employer agree to them. I must put “principle” in quotation marks, because some employment is not covered by the minimum wage law, so the “principle” does not apply to everyone.

Now, at the other end of the wage spectrum, we are enacting a maximum wage law. President Obama’s pay czar, Kenneth Feinberg, is mandating substantial pay cuts for executives in banks and auto companies that received federal bailout money. In addition, Federal Reserve Chairman Ben Bernanke has proposed a plan to limit compensation of all bankers — not just those who received federal money — in an effort to prevent risky investments by banks. Bernanke’s maximum wage law would not set any hard-and-fast maximum; rather, it would allow the Fed to, at its discretion, veto compensation schemes it didn’t like.

Like the old minimum wage law, the new maximum wage law would not cover every worker, but Mr. Feinberg did say he hoped his guidelines “might be voluntarily adopted elsewhere.”

For decades the federal government has had a minimum wage law to keep people from being paid too little. Now it is enacting a maximum wage law to keep them from being paid too much. It doesn’t cover everyone, but with a foot in the door, it will be a small step toward broader coverage.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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