The Government's announcement of a new "starting-out" wage for young people has, unsurprisingly, been met with mixed reactions. There are valid arguments for and against this new policy - proponents assert it allows young people without work experience to "get a foot in the door". On the other hand, opponents argue it will lead to older workers losing their jobs so that firms can hire young people at the cheaper rates.
Reducing wages to create employment has the potential to work, but not the way the Government is implying. The wages which need to be reduced are those of the CEOs and other high-level management positions.
Former Telecom CEO Paul Reynolds is the often-referenced example of how salaries for those at the top of the pyramid have become obscene. Herald columnist Deborah Hill Cone used him as her example when she raised similar issues with CEO pay. She mentioned that Reynolds "earned $30 million in five years with the company". That figure - made up of base salaries, performance incentives, share incentives, etc. - equates to $6 million a year.
What did Reynolds do to become the $6 million man? It is something of a mystery. Under his leadership, Telecom dropped from top place on the NZSX - a position it had occupied since 1991 - following the XT debacle in 2010. Share prices plummeted. Reynolds' response was to go fishing. Despite all this, Reynolds was, according to the Herald, earning $34,000 a day during the 2012 financial year.
Supporters of such excesses claim these CEOs add value and help grow their companies. Why, then, do CEOs who do the opposite - such as Reynolds - still receive such engorged salaries? If they were on the factory floor, they would have lost their job by now. Furthermore, such justifications for CEO salaries tend to insult workers whose efforts do add value to, and grow, the company. If this seems far-fetched, consider what would bring Telecom to a halt: a strike by its engineers, or a strike by its CEO?
Let's suppose despite that example, CEOs do in fact grow companies. Why, then, are they not applying these skills to the creation of new businesses, with new jobs and opportunities for workers? The answer, it seems, is a lack of incentive. Why try and start up a new business when you can be employed by an existing business for $6 million a year?
This is where the maximum wage comes in. If the top salary is legally fixed at, say, $200,000 a year, these economic miracle-workers running companies will have no choice but to start their own businesses where, as shareholders, they can indulge in the dividends they deserve. The creation of new companies will in turn lead to more jobs, thus negating the need for any "starting-out" wage.
A maximum wage also has a trickle-down effect. The millions of dollars that would have been paid to CEOs could instead be paid as bonuses to workers, or used to lift the average wage of employees at the company. These people could then spend their extra income, further supporting the economy.
Critics are likely to label the concept of a maximum wage as "socialist". In fact, wage reduction is a neo-liberal idea. The National Government has already espoused it, although their focus was on workers rather than their bosses.
A maximum wage does not stop people from accumulating money. Rather, it encourages those who enjoy having plenty of money to diversify their income sources through investment in the local economy, which leads to jobs and growth.
If the Government is serious about creating a fair and prosperous New Zealand, then the maximum wage is a step in the right direction.
Ryan Wood is a history student at the University of Waikato.
