Rhode Island Senate Considering “Maximum Wage” Legislation

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The Rhode Island Senate’s Finance Committee is considering Senate Bill 2796. If you live in Rhode Island, or have friends or family that are state residents, I strongly urge you to have them write or call their state senator in support of the legislation.

Here’s the key provision of the bill. It would amend Chapter 37-2 of the General Laws entitled “State Purchases.” It would incorporate a new section 37-2-81, “Selection of vendors and services based on economic security and pay equality.” Section 37-2-81 empowers and directs the head of the department of administration to establish rules and regulations that give priority in contract and/or subcontract awards to business enterprises whose best-paid executive receives compensation and/or salary equal to thirty-two times or less than the compensation and/or salary paid to its lowest-paid full-time employee.

I’ll be the first to admit that this legislation needs to be tightened, since companies could escape the force of the bill by turning low-pay full-time employees into part-time staffers or turing the worst paid “employees” into contractors. But this is an extremely promising start, and people who call the legislature to support the bill can urge that this loophole be closed.

Doug Smith, one of the founders of the heterodox economics association, Econ4, has been a vocal advocate of the maximum wage concept. From his testimony to the Rhode Island Senate’s finance committee:

Like the rest of the nation, Rhode Island currently faces a crisis of income and wealth inequality. Between 1979 and 2007, the top 1% of Rhode Islanders captured 32.6% of total income growth in the state.

For comparison purposes, the 32.6% that has gone to Rhode Island’s top 1% is dramatically higher than the 23.6 percent of income going to the top 1% of Rhode Islanders in 1928 – on the eve of the Great Depression.

Rhode Island’s economy, also like the rest of the nation, is substantially consumer-driven – two-thirds or more of any growth comes when people buy goods and services. The top 1% in Rhode Island have ample money for spending. But studies – and common sense — indicate that the super wealthy do not devote as high a percentage of their income to consumption as do the bottom 99%. For Rhode Island’s economy to have any chance whatsoever of real recovery and growth, at least one imperative stands out: The state must get more money in the pockets of the 99%.

Unfortunately, as Rhode Island Treasurer Gina Raimondo has detailed, this imperative is not being met. Average Rhode Islanders are losing ground:

• 63% of Rhode Islanders say they have difficulty covering expenses and paying bills, and only 38% have emergency funds set aside.

• Nearly one in ten Rhode Islanders has had to take out a loan or hardship withdrawal from a retirement account in the past year.

• Rhode Island has the nation’s third highest state average for personal credit card debt.

• The volume of Rhode Island payday lending doubled between 2008 and 2011, to $70 million.

• 22% of Rhode Islanders with mortgages have missed at least one mortgage payment.

Put differently, Rhode Island’s economic security is in jeopardy.

By providing state contracting and sub-contracting preferences to business enterprises whose executives earn no more than thirty-two times those enterprises’ lowest-paid workers, SB2796 incentivizes businesses seeking government contracts to change the ratio of top-to-bottom pay through some blend of reducing top executive pay and increasing the pay of other employees.

A lower top-to-bottom ratio increases Rhode Island’s economic security in several ways:

• Increases in employee pay translate immediately into more consumer spending, reduced household debt, and investments in education and other economy-supporting assets

• Decreases in top executive pay translate into some combination of higher pay for other employees, more jobs, and more earnings that, in turn, mean higher tax revenues for Rhode Island, higher dividends for shareholders, and higher retained earnings for investment in business growth and more jobs

SB2796 actually does even more for a healthier, happier, and more sustainable Rhode Island than these outcomes suggest. The legislation promotes sound business practice that, in turn, produces greater business productivity and success.

I have spent more than thirty years working as a consultant with businesses in over fifty different industries. I have seen at first hand the deleterious effects on business productivity that inevitably arise when top executives earn hundreds of times the pay going to other employees.

This dangerous rise in top-to-bottom pay ratios fuels a cancerous spread of business strategies obsessed with cost reductions and short-term financial performance. The result: outsourcing, offshoring, tax avoidance, downsizing, and the substitution of good-paying permanent jobs with temporary, precarious employment.

Smith made the general case for a maximum wage in a 2011 post, using a 25-to-one pay ratio as his model:

We face severe and growing income inequality with negative effects on people and the economy. Yet, no surprise, the ‘can’t do’ right wing continues a scorched earth campaign against the minimum wage. These self-promoting haters actually prefer no wages and indentured servitude – for example using prisoners to replace employees and cheerfully promoting ‘internships’ for the unemployed…

But people who seek to shrink income inequality — to insure life, liberty and the pursuit of happiness for all and not just some — must now focus as much on the maximum wage as the minimum wage.

So, be it proposed:

“That any enterprise receiving taxpayer funds shall not compensate that enterprise’s highest paid person in an amount greater than twenty-five times what the lowest compensated person receives.”

First, note that this proposal would not apply to enterprises that do not receive any taxpayer funds.

For those, however, receiving bailouts, deposit insurance, government guarantees, tax breaks, tax credits, other forms of public financing, government contracts of any sort – and so on – the top paid person cannot receive more than twenty-five times the bottom paid person. This ratio, by the way, is what business visionary Peter Drucker recommended as most effective for organization performance as well as society. It also echoes Jim Collins who, in his book Good To Great, found that the most effective top leaders are paid more modestly than unsuccessful ones. And, critically, it is a ratio that is in line with various European and other nations that have dramatically lower income inequality than the United States.

Note, second, that this identifies the top paid person – not the CEO. Even though outrageous CEO pay and its ill effects on severe income inequality is much in the news, CEOs are not always the highest paid person.

Third, the proposal uses a ratio – 25-to-1 – instead of an absolute dollar figure. If a taxpayer funded enterprise wishes to pay the top person, say, $50 million, they can do so: just as long as the lowest paid person receives $2 million. In other words, instead of today’s limitless top wage being supported by taxpayer money – that is, socialism for the rich and only the rich — this proposal is equitable toward all.

Fourth, the choice of compensation is made by the enterprise – not by government officials.

Fifth, this approach to the maximum wage dramatically benefits the economy through some blend of more job-creating investment by the enterprise (through deploying higher retained earnings), and/or more consumer spending, savings and investment because of increased take home pay (and/or shareholder dividends) for the many instead of the few. It would, for example, immediately provide stimulus to restart our heavily consumer-driven economy.

Sixth, this proposal is competitively neutral: all enterprises using taxpayer funds must abide by the same 25-to-1 ratio of top-to-bottom compensation. In most industries, competitors respond to opportunities similarly; that is, if there are government opportunities, all try to take them and, if there are no such arrangements, none do…

Nor, seventh, would this proposal have any adverse effect on the market for talent. Again, all enterprises are subject to the same rules. Moreover, there’s never been any – zero, zilch, nada – evidence that top pay correlates with sustained enterprise performance. Indeed, quite the reverse…The more likely result is the opposite: the maximum wage ratio will put enterprises using taxpayer funds on a better, sounder path to performance than those who don’t use taxpayer funds!!….

Eighth, this proposal can and should be enacted by all federal, state and local jurisdictions that provide taxpayer funds to enterprise. And, of course, with the appropriate inclusive definitions of ‘compensation’ (salary, wages, bonuses etc) and “person’ to avoid cheating and evasion…

It is the free choice of free enterprise whether or not to use OUR MONEY. If you are part of an enterprise and wish to pay anyone, including yourself, more than today’s all-too typical extreme, greater than 300 times the lowest wage earner, go ahead.

But do not use OUR MONEY.

As various commentators have pointed out, the Administration’s proposal to raise minimum wages would benefit only a small number of workers. Proposals like Seattle’s plan to raise the minimum wage to $15 an hour is an important step towards recognizing the need for workers to be paid a minimum wage. It is an important step forward for those at the very bottom, but it won’t dent income inequality, which has corrosive effects on society long term. By contrast, with the great advances of socialism for the rich via direct and indirect subsidies to business, the notion of a maximum wage has great potential leverage. I hope you’ll support this initiative.

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33 comments

  1. Tyler

    I’d prefer we just raised the wage floor, i.e., raise the federal minimum wage. Minimum wage is the most effective way to say to businessmen, “You’re going to pay your workers at least this much. Find a way to make it work.”

    I think the federal minimum wage should be $20. Why? Because workers in places like NYC need to make at least $20 an hour to live comfortably.

    1. washunate

      Agreed, but I’d go even further and point out that $20 is a bare-bones minimum wage.

      The average annual hours worked in Germany, for example, is about 1,400. If an American worked that at $20 an hour, that’s only $28K a year. In order to make $20 an hour comfortable, you’d have to also mandate several weeks of paid time off, time and a half overtime at 30 hours a week, raising the salary test for overtime exemption, retirement benefits, medical benefits…

  2. John

    Another possibility is for states to enact salary indexing laws. In other words, employers must provide pay raises to its employees based on a cost of living adjustment every year. No more waiting on Washington to do something.

  3. ambrit

    One idea would be to raise the Capital Gains Tax to 50%.
    As for the obvious counter argument that elites would offshore their assets away from states adopting this strategy, just exile the b——s. Make them persona non grata and demand that true locals run the show within a polities boundaries. (That of course would require the re-suborning of the political class. However, if re-subornation doesn’t work, a little anthropocentric forced evolution could do the trick.

    1. bob

      “just exile the b——s”

      Insuring that they don’t pay any taxes. Foreigners and foreign companies don’t pay tax on US gains. That’s a big part of why the US is called a tax haven, and why Mitt Romney and Bain base all of their funds out of the caymans or Bermuda.

      Round-tripping.

    2. NotTimothyGeithner

      The state has the bureaucracy to do this. This is an example of great state government if it happens.

  4. scott

    Once simple rule. Any public company that buys back it’s own stock can not pay an executive more than 100x the lowest paid employee. Either stop using your cash flow to prop up your stock price (e.g. invest and pay your employees better), or go private. QED.

    I worked at a semiconductor company that has spent $20 billion in the last 15 years buying back it’s own stock. They could have bought all of their competition with that money.

  5. Clonal Antibody

    Yves,
    Most of the income of the rich does not come from wages, but rather from capital gains and other unearned income. So the maximum wage law would be another turn of the screw and increased pressure on the professional middle class. It will do little to combat inequality, which as Picketty has eloquently pointed out comes from non wage income.

    1. Clonal Antibody

      I did not mean to imply that this will do little. This IMO if passed will be a good step. However, CEO compensation does not in the main consist of wages. It consists of various compensations including stock options, and typically they are taxed as long term capital gains.

      Further, the super rich will “take only $1” in annual salary, knowing full well, that the pot of money is not in the salaries. I think there was a well publicized stunt by (if I remember correctly) Elon Musk of Tesla.

      The answer in my mind is to merge all sources of income, and to go back to tax rates that existed in the 1950’s

    2. SqueakyRat

      In fact, Piketty says explicitly that the rise, in the US, of income inequality since 1980 “largely reflects an unprecedented explosion in very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population” (Capital in the 21st Century, p. 24.)

  6. Ulysses

    All of my peeps who live up in lil’Rhody (where I lived for over a quarter century) are excited about this one. Let’s hope it happens!

  7. OMF

    Why bother setting a maximum wage? Why not just introduce graded tax bands so as to effectively introduce such a maximum?

  8. ptup

    Well, that’s going to do wonders for the R.I. economy. Should inspire many to invest in the state.

  9. Mel

    There will be a lot of gaming around “full-time”. Just as with laws that say that otherwise mandatory benefits don’t apply to part-time employees: suddenly everybody is part-time. How that gaming will be thwarted is the next question.

    Also a lot of highly paid employees will become service-providers working B2B. There’ll have to be at least some kind of chaining provision make the law apply to them.

  10. Shiftoner

    RI resident here! I already contacted the office of my state senator, who is a member of the finance committee, to extend my support of this legislation. I will head down to the state house in person next Tuesday, May 13 to offer whatever personal testimony I can in support. I hope any other local readers who are able to will consider doing the same. Thank you very much for bringing attention to this bill!

  11. Foppe

    How will this interface with contracting, though? Way back when during the Middle Ages, companies used to employ their own cleaning crews, etc. Nowadays they generally don’t. Will their pay be relevant in determining what the minimum paid wage at the company is? (And what about daughter companies?)

  12. bob

    Considering the long history of very old money in RI, this is a farce. Maximum wage? None of them make wages…they collect dividends and muni cupon payments.

    LSS- Work for wages, get capped. Inherit enough, and earn as much as you would like.

    This seems to legislate an upper class, the exact oppposite of what it purports to do- insure more inequality.

    How about getting rid on muni tax advantages? Nah…

    1. bob

      Muni’s tax deductions are the biggest and baddest problem today. Perhaps in the past they were used to fund gov work. The demand for the bonding was in response to a public need.

      Now, bonding is the first step. Wall St decides it needs more tax credits to sell. They then go out and find a project that is big and fast enough to get the bond issue shoved through and the tax free interest rolling.

      It’s all backward. Demand is not coming from the need for projects, it’s coming from the “need” of wall st for more tax free income. project be damned.

      This is also not saying that muni projects aren’t needed. They are, badly. But, they are usually way too slow for wall st. Easier to hand the publicly bonded money to a public private “project” that builds a mall, or a stadium, or anything else. Money going out the door fast enough for wall st to be happy.

      “A 10 year project to re-do water service? Way too slow. We can get you that tax free income in less than one year with a new stadium!”

  13. Mike

    They should really raise the minimum wage to at least $50 an hour. Think of elimination of all welfare benefits, as most people would make as much in two eight hour shifts a week as they do with food stamps and rent assistance. They could also afford to buy things outside of necessities, like a car or a boat, and take their family on a vacation.

    1. human

      $50/hr is excessive, if not snark, but $20/hr is certainly about correct for a minimum wage. Just think of the additional spending at Main St! Like morality, caps can not be legislated. There are too many loopholes to be exploited. We must return to a sane tax code that taxes wealth, not the “sweat of a man’s brow.”

      A back of the envelope example of the excess of the .01%: Consider that half the income of those top 25 hedgies would cover a $10,000 annual increase for each of 1.25 million workers.

  14. impermanence

    How about if we just address the problem and revoke ALL corporate charters?

    All these other “solutions” are analogous to having a patient show up at the ER in cardiac arrest, diabetic coma, and pulmonary failure, and having the attending doc concentrate his ingrown toenail.

    It is the corporate organization of business that makes most this non-sense possible. This has been known for two hundred years.

    1. zapster

      Because they’ll just laugh and continue business as usual.
      We can’t even prosecute them for unequivocal, egregious crimes under existing law now. How will changing that help? We have to take their power away first–get the money.

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