Minimum Wage vs. Maximum Ratio

understanding the implications

Is there a better way to promote a living wage for the working class? Some people think that minimum wage is counterproductive. Let us examine an alternative called maximum ratio.

Last Updated: January 2010

  Definitions:

Minimum Wage is the well-known law that says that an employer must pay all of his employees more than a certain amount per hour.

Maximum Ratio says that the salaries of the top earners within a company can not be more than a stated multiple of the lowest salaries.

Tax on the rich is the other side of minimum wage. Where minimum wage is designed to push the bottom up, the tax on the rich is designed to push the top down. There exists no more than a philosophical correlation between the two.

Maximum Ratio was pioneered by Ben & Jerry's who's company policy said no employee may earn more than 7 times another. In most European companies the accepted ratio is about 25, but in the United States the accepted ratio for large corporations has increased to about 500, up from 100 in the 1980s.

Purpose

Minimum wage: to ensure that all workers receive a living wage.

Maximum ratio: to ensure that companies support their workers at a level they have proven they can afford.

Implementation

Minimum wage and the tax on the rich are set arbitrarily by congress. Periodically they chose new numbers to define minimum wage and tax on the rich.

 

Maximum ratio could be easily implemented by making corporate tax rate equal to the ratio between the highest compensated and lowest compensated within that company.

It could also be enforced with a penalty tax equal to all the wages in the company that are greater than 20 times the wages of the workers.

That means minimum wage set by political forces correlating to who is in power in Washington. As such, wage laws might not change with economic forces such as inflation, or a tight job market.

Maximum Ratio, once started, operates independently of political forces. A political party can't force the wages artificially low, or high. When things are good employers will raise their worker wages in order to raise their own.

kept from falling

Economic forces move the top and bottom wages up and down together pulled up
Implications for the Employer

If you restate minimum wage as it is experienced by the employer the law states, "If for any reason you are unable to pay at least the legal wage, then you are not allowed to create an opportunity for workers."

There have been reports of companies responding to an increase in minimum wage by laying off workers. There is no way to determine how many potential employers failed to create jobs because they couldn't afford the cost required by law.

Maximum ratio states to the employer, "If you can afford to raise the owners salary then you can afford to raise the workers salary." This approach is highly responsive to economic forces. For the managers to get a raise the workers should get a raise also.

Implementing maximum ratio gives the employer realizing huge profits three choices, [1] pay your workers a better wage, [2] reinvest your profits in the company (promote the viability of your company or create new jobs), [3] pay an increased amount in taxes to support the system.

If Managers share in the sacrifices, will the tend to make better choices?

Extreme Example: MicroSoft has 33,000 employees; CEO, Bill Gates is worth $85 billion. That means on average Mr. Gates has made two and a half million dollars off the work of each and every employee in Microsoft In contrast, if a software engineer worked for Microsoft for 20 years and averaged $60,000 per year, he would have earned 1.2 million total. In other words, the CEO profited twice as much as the employee did from his labor. (example)

All this occurred with a minimum wage, and a tax on the rich in place.

Theoretical example: The inequity described to the left could have been solved by nearly doubling the employees salaries. The employees would have been better off and the CEO would have still become rich.
Implications for the Worker

To the working poor, minimum wage states, "You may not accept employment, not even apprenticeship, unless the job conforms to federal requirements."

Maximum ratio says to the working poor, "you may accept a low wage job, if you consider it a greater opportunity than no job at all. "

You want to learn a new skill. Since apprentice wages are illegal, the only legal option is to go to school and pay tuition. Tuition could easily cost you $5,000. During this time, you might learn great things but you do not gain valuable on-the-job experience.

You want to learn a new skill such a carpentry. You could become an apprentice for a contractor, earning a meager wage, while the contractor teaches you the skill. After many months your wage may have been as low as $5,000, but you have learned a valuable skill while proving your abilities and willingness to work.

During hard economic times minimum wage says, "you may have no opportunity at all."

During hard economic times this states, " A lousy job is better than no opportunity at all."

 

 

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  Actual Examples

Through out the 1980s and 1990s many many companies were pillaged by takeovers. The results were layoffs and lower wages for workers, and multimillion dollar gains for the pillaging managers.

In the Philadelphia area, executives took millions pillaging the Allegheny Health System, many jobs were lost, and area hospitals were left teetering on the edge of bankruptcy. Enron executives pillaged their employees, investors, and customers, for tens of millions of dollars. Many other examples, such as Tyco and WorldCom are easy to find.

Minimum wage did not protect the workers, and the tax on the rich did not stop the pillaging. If there had been a maximum ratio policy, where laid-off workers were considered as earning $0.00, the pillagers could not have gained by driving down the company.

A young software engineer was laid-off during the "great recession" of 1991, when many engineers and financial analysts were out of work. He found a small struggling company in Allentown which agreed to pay him whenever money came in. During this time he learned the programming language "C" and a new set of hardware. The company never recovered so he only earned about $2 per hour. However, within 7 months he developed a skill set that he was able to sell to another company putting himself in the highest paid job he had ever had. If he had tried to develop the same skill base at a technical school he would have easily paid over $4,000 in tuition, without gaining on the job experience.

Ben & Jerry's maintained a maximum ratio of 7 for many years.

Microsoft with minimum wage and the tax on the rich still paid its CEO over $2 billion in one year

Had Microsoft used a maximum ratio of 25 (the international standard), the CEO would not have made $2 billion until the software developers each made $80 million.

Continued Discussion

In 1997, the Philadelphia Inquirer listed the top salaries of local companies paying their executives over $1 million. Advanta corporation, one of many companies listed, paid its top five executives $13.4 million. If each of these salaries were reduced to $1 million, the executives would still be rich, earning roughly 20 times typical middle class incomes. That would return $8.4 million to the company, enough money to produce over 150 middle class jobs. In contrast, this could be used to reduce fees for customers or raise wages for the productive workers. How much of a change would this amount to? (see more detail)

For classrooms or activists considering the comparison between minimum wage and maximum ratio:
  • what are other shortcoming of minimum wage
  • what are benefits of minimum wage
  • what are intrinsic procedural problems with minimum wage
  • what happens to a person's real income when he jumps from welfare to minimum wage

 

 

  • what short comings would maximum ratio have
  • would minimum wage have the same shortcomings
  • would maximum ratio have the same benefits as minimum wage
  • what are the intrinsic procedural problems with maximum ratio
  • what would alternative implementations of maximum ratio look like
  • how should maximum ratio evaluate layoffs and contractors
  • when a director make much more than the general populace can his organization really be "nonprofit"

 
 

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