Maximum wage lead to reduction in inequality PDF

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“A maximum wage is a necessary measure to reverse the UK’s rising inequality.” To what extent do you agree that the UK government should impose a maximum wage. Maximum wage refers to the highest wage a worker can legally be paid, in which Corbyn has suggested that CEOs should be paid a maximum of 20 times the wage of the lowest paid worker in the firm. A national maximum wage set below the equilibrium market wage at Max price, will reduce wages causing demand to extend to Q2 and supply to contract to Q1. If workers that were highly paid receive lower wages at Wmax, their incomes will decrease, reducing inequality between the workers in the firm. Moreover, when the maximum wage is set 20 times the wage of the lowest paid worker in the firm, the CEOs of the firms may be incentivized to increase the wage of the lowest paid workers in the firm, so that the CEOs and executives will be paid with a higher maximum wage. This may result to a decrease in the wage of the highest wage workers and an increase in the wage of the lowest paid workers in the firm, reducing the UK’s inequality and improving the living standards of people that were paid the least in the firm.

However, a maximum wage will create a shortage of workers, since CEOs in the company may lack the incentive to be productive, thus these high-skilled workers may opt to move abroad to countries with no maximum wages to earn more income, or opt to retire early, instead of contributing to the workforce. This may lead to firms not being able to find the workers they need, needing to resort to employ lower quality workers, further reducing the productivity of the firm, increasing the firm’s costs and reducing profits. With the decrease in profits and increased costs, firms are not incentivized to innovate and invest, and become less competitive internationally, further decreasing productivity and output in the long run. Moreover, the increased costs may be passed on to the consumers through higher prices, in which consumers need to pay more for the goods and services, reducing their real incomes and living standards, worsening inequality. In addition, a maximum wage can reduce wage costs for the firms and the governments through the reduction in wages for the highest paid workers. Since wages are a variable cost, so lower wages will decrease MC and AC, decreasing the price and increasing profits. A decrease in price will mean that lowpaid workers will be able to afford more goods and services with their limited wages, increasing their living standards, while reducing inequality. The government will also be able to cut the wages it pays to its public sector employees, such as Mark Carney, the Governor of the Bank of England, who earns nearly £900,000 annually. A maximum wage will lead to a reduction in his pay, allowing the government to spend the money to reduce budget deficits, or on other projects, such as education and training,

increasing the skills of the people on lower incomes, helping them break the cycle of being in poverty, allowing them to acquire more skills, thus being able to work in higher paid jobs with higher skills, earning more income, reducing inequality. However, a maximum wage will lead to a reduction in tax revenue for the government, as the wages of the highest paid workers decrease, the government’s income tax revenue as well as corporation tax revenue will decrease. In 2016, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined, this means that with significantly less tax revenue, the budge deficit will worsen, the government will also have less money to spend on benefits and other projects, such as health and education, worsening inequality and possibly productivity in the long run. Taking all things into account, the negatives outweigh the positives, suggesting that the government should not impose the maximum wage, due to how easy the highest paid workers in the firm can easily evade the imposed maximum wage through moving abroad, and how damaging a reduction in tax revenue will be to the economy, thus further worsening the inequality....