The Maximum Wage: a Bad Idea (And Not Justified by Sports)

September 6th, 2020 by 

In the US back in 2014, multiple pieces argued that the ultimate path to salvation in American economic life lie down the road to the maximum wage.

Yes, that’s right – multiple articles in seemingly serious publications argued the United States should arbitrarily cap the amount of money a person can earn.

I'll give comedian, late-night host, and Community actor John Oliver a break. His attempts to justify the maximum wage, while naive, didn’t approach the ridiculous arguments of Matt Yglesias. Mr. Yglesias – imagine this – honestly argued that the competitive balance in sports is reason enough to try to cap wages in the rest of the economy.

Sports Do Not Justify the Maximum Wage…

We’ve penned thousands of words on the issues with sports, and I’d ask you to reference our three major pieces on the problem of pay in sports. Note that Judge Claudia Wilken, who ruled in favor of UCLA’s Ed O’Bannon (and company) in an antitrust suit against the NCAA regarding using the names and likenesses of players, inserted a bit of ‘current events’ fun into the original form of this piece.

For the contemporaneous readers, let's rehash some of the arguments.

The NBA and the NFL are the worst offenders in a Congressionally supported sports cartel.

In the NBA and NFL, you've got two organizations where rich owners get together to dictate the maximum amount that other owners can pay their talent. That talent, mind you, often hails from poor backgrounds. 

Furthermore, both professional organizations count the NCAA as a feeder league. The NCAA does't pay players. Then, the NBA and NFL set league minimum ages forcing players to play in the NCAA for free.

Stakeholders in the NBA, too, often discuss raising the minimum age of players that join the league for 'maturity' reasons.

This all makes no sense. Here's a list of so-called ""immature"" High Schoolers:

  • Kobe Bryant
  • Amare Stoudemire
  • Shawn Kemp
  • Darryl Dawkins
  • Moses Malone
  • Kevin Garnett
  • Tracy McGrady
  • Tyson Chandler
  • Dwight Howard
  • Lebron James,
  • (and so many others)

Can you seriously argue none of them worked out?  Nevermind the fact that the NHL and MLB (not to mention MLS and NASCAR) don't have age limits and patriarchal restrictions on their talent.

No, the NFL and the NBA are the top two offenders. They are the strictest with their salary caps, and put the most restrictions on players leaving college to earn a living. 

In the case of the NFL, especially, there isn't a realistic foreign country where you can play ball. You either put in your three years of working for no pay, or you fall back on your (tutor earned?) University Studies degree.

Sports exploit talent, especially in leagues where most of the talent comes from poor backgrounds. Maximum wages exploit talent even more - not only do athletes need to make it through the ringer injury free, then they're told it's not worth what they thought it was.

Maximum Wages in Sports and Business

Sports are Entertainment. Without competitive balance there is no drama. Sports literally DEMAND competitive balance.

  • If the Yankees won every year, would people still watch baseball? 
  • If the Miami Heat won every year, would you watch basketball? 
  • (And so on)

If you answered in the affirmative, I'd ask you: why do more people watch the NBA than the Harlem Globetrotters? Sports demands competitive balance, otherwise you wouldn't tune in.

Permanently overpowered teams don't provide drama.

Competitive Balance Outside of Sports

Business isn't Entertainment. (Well, most of the time.) There is no need to maintain competitive balance among companies - and there is especially no need to optimize for drama.

So, does competitive balance hold up when you remove drama?

Competitive balance is a touchy issue. Some countries – and, ahem, the entire European Union – have taken a strange look at antitrust law, concluding it should protect companies, not consumers. 

Yes, that's right - the European Union literally makes competitive balance a core tenet of its antitrust rules.

The United States is different, it's consumer-centric. The fact 4-5 politically blessed companies are on the same level competitively isn't a major factor in deciding antitrust cases in the US. That balance has lead to many American companies getting hit by 'anti-competitive' fines by the EU in recent years.

Picture of pennies
We'd pay you more, but, you know, that pesky law!

A Maximum Wage, therefore, is a backdoor way to promote competitive balance.

Again: not competitive balance for people. For companies

And, in Mr. Yglesias's argument - the maximum wage wouldn't even apply for owners. His plan would keep the current capital gains regime in place and even encourage executives to leave money in the company (do you think stock buybacks are aggressive today? Just watch.).

Frankly, thought, I don't want owners and politicians to negotiate a maximum salary they can pay employees. The talent – you and me and the rest of the employees at a day job – would have no choice but to take whatever arbitrary limit was set.

A Maximum Wage Destroys Net Worth

A maximum wage would, of course, only affect income, not wealth

Gone would be the dreams of working for the man for years and years to save up enough money to eventually become an owners. (See our case study on getting rich with stocks – it's possible).

Your newly crowned Aristocratic Class under a maximum wage would be the rich folks of today. Unless you also add an ex post facto income tax, people who are already rich (and own companies) have a huge leg up.

When you can't make more than $2,000,000 a year, how will you start a company to keep up with the Kardashians? The only Millennials who will have the funds to start new companies are these ones.

Do you want to live in a world where the most innovative companies can't pay talent any more than any other 19th/20th century car company? 

Do you think it's somehow fair that our current competitive balance will be locked in place, and new companies can't outpay the market to try to grow? 

Think about it: would you jump ship from your Megacorp to an upstart if the upstart can't pay you anymore than you make today? Paying people to take risks is the only way upstarts can compete.

Let's Bury the Maximum Wage

Please, let's burn this argument, stomp it out, smash it, and bury it in the deepest pit imaginable. 

There is no logical reason to ever cap income in business. And while it works at some level in sports to ensure competitive balance, a luxury tax is an even better way [PDF].

Really, if the newest economic ideal is achieving perfect competitive balance between companies, punishing income earners, protecting wealth holders, rewarding politicians, granting journalists the ability to dictate worthy professions, and declaring the rich of today the new aristocracy, I want nothing to do with those economics. 

No - give me an America where an immigrant can put in 10 years at a firm and pocket enough to challenge the biggest company for market share. They might even eventually drive that firm out of business. 

All this Anti-Dog-Eat-Dog competitive balance rule would do is prevent companies from poaching their competitors' employees. It literally stops firms from competing.

And especially don't give me an America where the government and 30 companies get together to determine the maximum that any company can pay talent. The NBA is not a good role model for the American economy.



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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