The first flaw in it is that it’s lousy presentation, and suggests Corbyn’s team have learned little from behavioural economics. A wage ceiling allows lackeys of the rich to whine that Labour hates the well-off. We should reframe the policy. Rather than say nobody should earn (say) 20 times more than the lowest earner we should say that nobody should earn less than one-twentieth of the top earner. We should call the wage cap a wage floor.
The second problem is that a blanket wage floor is too blunt a policy. It doesn’t distinguish between different types of inequality. Some wage inequalities might be tolerable on economic grounds* if they are rewards for great service. This might be the case for entertainers, sportspeople, innovators and even, I’ll concede, some good managers. Other inequalities, though, arise from rigged markets, cronyism and exploitation. It’s these we should most want to abolish. But a simple legal wage floor hits all inequalities indiscriminately, as do higher taxes. That’s sub-optimal.
There are, though, solutions here.
One possibility, as Corbyn says, for the wage floor to apply only to government contracts. Here, the problem of deterring innovation isn’t so great: what matters is that contracts be sufficiently well-written to avoid agency problems. A wage floor would help disincentivize the rent-seeking that accompanies outsourcing.
A second possibility is to have worker and/or consumer representatives on remuneration committees for larger firms. If a manager or innovator adds great value, the dispersed wisdom of crowds should recognise this and so accept a high wage ratio. But where managers are mere rent-seekers, the committee will rein in his pay.
It’s possible that these mechanisms will actually stimulate the free market that rightists (often insincerely) claim to want. If a manager thinks he has great talents which aren’t sufficiently rewarded by a cap on wage ratios, he should set up his own business where the wage cap doesn’t apply**. In this way, a wage floor might actually incentivize entrepreneurship.
I’d add three other observations:
Corbyn is right to identify inequality as an issue. The fact that productivity has stagnated after an increase in inequality should alert us to the likelihood that inequality is indeed bad for growth.
Measures to tackle wage inequality, however, are not sufficient. Inequality of pay is a symptom of inequality of power – and this is an under-rated problem.
What we want here are policies that are stepping stones towards more socialist ones. For example, a cap in inequalities in companies getting government contracts might encourage the growth of co-ops. And greater worker representation on remuneration committees might lead to demands for more worker power in other dimensions. Blind statist policies might be a dead-end, but more flexible and empowering ones might not be.
* We should distinguish between economic and moral objections to inequality. Even if inequalities arise in a perfectly free market and have no adverse economic effects, there might still be philosophical objections to them from, for example, luck egalitarians.
** If worker/consumer-dominated remuneration boards only applied to firms employing more than 250 people they would cover only 0.4% of companies. This would provide a very big sector where bosses could earn as much as their talents would permit.