The employment arena has seen numerous attempts over the last few centuries to create what is commonly known as ‘pay equity’. Two contemporary examples are wage caps and maximum wages. The former is legal in the United States, the latter is not. But is either one a good idea?

Wages are a very sensitive topic among American workers. And rightly so, by the way. This country was built on the premise of working hard and being rewarded for your labors. You start messing with someone’s wages and you are likely to awaken a sleeping giant ready to do battle. So it baffles the mind that both wage caps and maximum wages continue to be a matter of debate. But they are what they are.

What Are Wage Caps?

Dallas-based BenefitMall, a nationwide provider of payroll processing and benefits administration, explains that a wage cap is a hard limit placed on the amount of money an employee can earn. The limit is established and enforced by the employer, usually based on annual earnings. Wage caps are also known as salary caps in some circles. Think of pro sports as an example.

Top-tier leagues like the NFL and NBA have salary caps in place. Leagues impose salary caps as a means of promoting competitive balance. Without them, you would have wealthy teams in large markets virtually buying championships every year by spending unlimited amounts of money to land the best players. Less prosperous teams in smaller markets would never be able to compete because they couldn’t afford to.

Outside of sports, companies may enact their own wage caps in order to prevent pay for certain jobs from climbing too high. This is a practice sometimes known as red circling. An employee who reaches the limit for that particular role is circled in red, meaning he or she has no hope of earning anymore no matter how long employment continues with that company. For this reason alone, wage caps are a bad idea.

What is a maximum wage?

A maximum wage is a government mandated cap on the amount any one person can earn during a pay period. Maximum wage is not legal here in the United States, but other countries have attempted to adopt the concept as a way of establishing pay equity. It doesn’t work.

As the thinking goes, a maximum wage would prevent senior management and business owners from earning a lot more than their workers – off the backs of those workers who provide the labor. What proponents of maximum wage laws seem to not grasp is the fact that the highest-paid earners in the corporate world, outside of sports, do not earn the majority of their income from wages and salary. It comes from stock options, performance bonuses, and other forms of non-standard pay.

Countries that have tried maximum wage have all seen the same result: reduced economic activity. Any time a government attempts to achieve pay equity by limiting how much a person can earn, it takes away any incentive to work above and beyond the artificial wage limit. The natural result is a loss of productivity.

Artificially controlling wages in an attempt to establish pay equity never helps those on the lower end of the economic scale do better. It only limits those on the upper end. There is nothing equitable about that. If pay equity is achievable, and that is still up for debate, a better way to do it would be to create more opportunities that actually help workers on the low end of the scale to earn more.