"Maximum Wage" Law

Dear Ask the Economist:

Should the government ever impose a "maximum wage," and if so, what should it be?  Would a maximum wage law help or hurt the economy?

Let me begin by saying that a wage should be thought of as a price—specifically, the price of labor. As such, there is both a supply of and demand for labor that will vary as the price (or wage) changes. All other things remaining the same, when wages in an occupation go up (perhaps because of an increased demand for the kind of labor involved or because fewer people are entering that field), it tends to attract a larger supply or put a damper on demand, or both. Price is the marketplace's way of bringing supply and demand together so that they are equal.

If government fixed a "maximum" price for some job or all jobs, then it would simply prevent supply and demand from coming together. If wages would naturally rise to a certain level because of the supply of and demand for labor, but the government puts a cap on them at some lower level, the result would be a shortage of labor. At the lower "maximum" price, more people would want to hire others for that job but fewer people would be available and willing to work. So fixing a maximum wage would be pure folly—bad economics that could not possibly help the economy.

Inflation, by the way, is not rising wages. Inflation is not rising prices, either. Inflation, properly understood, is an increase in the supply of money and credit—which has, among its many effects, the effect of boosting prices and wages. But the answer to inflation is not to clamp controls on either prices or wages, but to stop the expansion of the money supply, or at least slow it down.

That's an economic answer to your question, but I also want to inject a moral component. It would be fundamentally immoral for government to impose a "maximum" wage. Think about it. To enforce a maximum wage, you have to be prepared to fine or imprison people for the "crime" of offering higher wages to other people. Why should that be a criminal offense? Isn't a job contract between people nothing more than a mutually beneficial act of consenting adults?

Can you imagine being an employer thrown in jail because he offered a wage to someone above the government's maximum? Sitting there in his cell next to a convicted murderer who asks him, "What are you in for?" the employer would have to say, "I tried to give somebody a job at a wage the government said was too high." How silly. Offering a job to somebody who willingly accepts the terms should never in and of itself be illegal. The only places such acts are illegal are in totalitarian societies like North Korea, where the government pretends to know everything but actually knows almost nothing and the people live as slaves and on the edge of starvation as a result.

We will never have a government-decreed "maximum wage" unless the American people decide they want to scrap their heritage of freedom, ignore economics, and hand control of their lives and businesses to politicians—who most of the time don't know how to balance their own checkbooks, let alone that of the national government's.

"Can you imagine being an employer thrown in jail because he offered a wage to someone above the government's maximum?"