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Explainer: Why can’t we cap CEO pay?

Paddy Hirsch Jan 15, 2014

Income inequality is one of the phrases of the month in Washington, following the President’s December speech on the issue.

President Obama threw his support behind a proposal to increase the minimum wage to $10.10 from $7.25, and to provide for automatic annual increases linked to changes in the cost of living. This week, Rep. George Miller (D-Calif.) and Sen. Tom Harkin (D-Iowa) discussed the issue with Council of Econmic Affairs chairman Jason Furman.

On the face of it, raising the minimum wage appears to have a lot of support.

A group of 75 economists came out in support of the proposal, including seven Nobel laureates and several former Obama and Clinton administration economists. A poll by Hart Research found that 80 percent of Americans support the proposal, including 80 percent of political independents, and 62 percent of Republicans.

But despite the swell of support, the proposal seems unlikely to make it through the House. A similiar measure failed in March of last year, with every Republican and six Democrats voting against raising the minimum wage. Republicans in Congress tend to argue against raising the minimum wage, arguing employers who are forced to pay workers more would hire fewer people or cut those workers’ hours.

Moreover, the argument goes, employers might handle the added expense of paying workers more by passing costs on to consumers in the form of higher prices.  

So if there’s such a strong reaction to the idea of using the minimum wage as a weapon in the war against income inequality, what about an alternative approach? Pay caps, for example.

Switzerland recently toyed with the idea of capping CEO pay at 12 times the amount of the lowest-paid worker. But a referendum on that issue voted the idea down.

And it’s pretty easy to see why that idea is unlikely to fly here in the U.S. For one thing, it puts a ceiling on the American Dream, or at least that part of it that has Americans aspiring to huge mansions and private jets. But on a more practical note, it rewards certain industries disproportionately.

For instance, the lowest paid worker – or even the average worker – in a software company or law firm is almost certainly going to earn more than the worker on the bottom run at a hotel company. Which means hotel company executives are liable to be rewarded a lot less for their work, even if their businesses employ many more workers (and are that much more valuable to society) than the law firm. It also means the CEO will likely get paid less — potentially a lot less — than other workers in the firm. 

No way that idea flies here.

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