Maximum Wages – Indian Perspective

Academia

Maximum Wages – Indian Perspective

Kritika Rastogi | June 2012

“The rich keep getting richer and the poor keep getting poorer”. This has been a concern for the Indian democracy for long. One of the many possible solutions to this problem is to put up a ceiling on the income of the individuals, says Kritika

Maximum Wages Bill, passed in the United States of America in as early as 2009, imposes a ceiling to limit top salaries to fifteen times the minimum wage and beyond that ceiling the salary is taxable up to 100%. A similar legislation has been passed in Egypt in 2011.

In India, till the 1980s, the President of Indian drew the highest salary and no other person could draw a salary higher than him/her. This rule ensured that there was always a check on the payable salary. After this was scraped, India witnessed a steep rise in the salaries of individuals working in private. However, the salaries of government officials and the defence services were not increased at such a steep rate, and this resulted in income differences.

Over the past 10 years, chief executives’ pay has risen nine times faster than that of the median earner. The bosses of big companies, though they call themselves risk-takers, are 13 times less likely to be sacked than the lowest paid workers. The risks are carried by other people. So, how do we compare different incomes when individuals are paid not only salary but also perks like accommodation and travel expenses? How can we justify why money is rotting in the bank accounts of some, others are dying due to poverty? How can we ensure that the money is circulated to those who actually need it?

CONCEPT

The concept of having an income ceiling is different from claiming black money or a corruption free society. Maximum income means that there is a fixed slab beyond which you cannot get paid, and if you earn beyond that, you are to give it back to the society. It is different from paying taxes where you give a part of your income for the welfare of the society

Consider a situation where a well- educated man in private sector gets a promotion and starts earning the income which has been slated to be the maximum income. Meanwhile, he is also engaged in some business which ensures him additional income. His collective income is more than the permissible income. This can also be called his ‘extra money’. He may desire the money, but he may not need it. There may be some other persons who might need that money for their survival. In order to ensure that this ‘extra money’ reaches them or provides for their benefit, it is important for this money to be present in the economy and not in the bank of the person.

ARGUMENTS

Supporters suggest that maximum wages help in reducing income inequality; helps firms to reduce costs and that in some labor markets, labor may have the ability to bargain for wages. Protesters suggest that governments do not benefit from maximum wages and hence marginal income tax on high earners is a viable solution. Apart from this maximum income can prove as a disincentive to work and may prevail a sense of social injustice amongst people. Countries like the United States of America, United Kingdom and France also provide social security, which makes it easier to implement a maximum income method, but this service of social security is not rendered by the Indian government.

The whole concept of having a maximum income slab is to ensure circulation of money. In the form of taxes, the government may or may not use the money for eradicating income inequality. Senator Barney Frank, one of the co-sponsors of the maximum wages bill passed in the USA, states “When C.E.O. salaries remain stable thanks to high taxation of high salaries, there’s little incentive to take big risks with shareholders’ money, and the economy remains in a steady growth mode”

Maximum income provides for the performance of a person to be judged in terms of other key achievements rather than his monetary accumulations. The uncontrollable desire to work or perform can be channelized towards recreational activities, social welfare, environmental welfare and other such activities that a person might ignore in the fight for earning more and more. As a long term benefit, this will also ensure in an increase in efficiency to work.

As far as social security is concerned, the Indian Constitution enshrines under theDirective Principles of State Policy, Article 41 and Article 42. Apart from this there are subjects in the Concurrent List as Item No. 23 and Item No. 24

Although these provisions relating to social security are not similar to those of the other countries, they are close enough in ensuring that the citizens are not deprived of any facilities in case their incomes are regulated.

CONCLUSION

It is no doubt one of the most important economic issues to eradicate income inequality. The defence of high pay is that it is needed to attract and motivate senior executives and give mid-level executives something to aspire to. The unintended consequences of that argument lie all around us in the landscape of the recession. J.P. Morgan, believed that to motivate people you didn’t need a ratio of more than 10 between the highest and lowest paid. In an efficiently functioning market there should be no exorbitant pay or profits. Competition is supposed to deal with that. There should always be someone or some business prepared to offer the same goods, skills or services for less. The pressure at the top should be down, not up, on salaries.

In India, we do not have maximum income legislation but there is a dire need for one. The report of the National Commission of Labour in its suggestions lay down that “It should have been done much earlier in view of the commitments in our Constitution and the conventions we have accepted. The need has become all the more important in the light of the new circumstances and changed factors that have emerged with globalization and new technology”