The annual CEO compensation bashing typically takes place in early January, when media reports inform us about the increased levels of CEO compensation, in a disapproving tone along the lines of: “By breakfast, in the first workday of the year, any of the highest paid CEOs would have earned more than an average worker would make in an entire year.” With a few exceptions (see a Financial Post op-ed by Jason Clemens and Joel Emes of the Fraser Institute), most commentators then focus on the income gap—the top 100 CEOs in Canada each now earn almost 200 times as much as an average worker. Indignantly, they call for capping executive compensation to reduce income inequality, in the name of “social justice.”
When focusing on the low end of the income spectrum, the social justice crusaders are trying to reduce income inequity by lobbying for higher mandatory minimum wages. They are having success with some of the provincial governments in Canada that subscribe to the socialist doctrine of egalitarianism. In Ontario, for example, the minimum wage increased over 20% overnight to $14 per hour at the beginning of the year. Alberta will raise its minimum hourly wage to $15 later this year.
Against all the contrary evidence, the Ontario and Alberta governments claim that having high government-imposed minimum wage will help reduce poverty, particularly among the unskilled—typically young—workers. The evidence, of course, shows exactly the opposite: higher youth unemployment, the reduction in the number of jobs and number of work hours available to low-skilled workers—and no reduction in poverty.
Both the government imposed cap on CEO pay and government imposed minimum wage are a bad idea. They stem from the same immoral basis and should therefore be scrapped. CEO pay caps and minimum wages are immoral because both curtail individual freedom by government force—yet, freedom is the fundamental requirement of human flourishing and prosperity.
When individual freedom is curtailed, companies and employees cannot negotiate mutually acceptable pay rates, based on a mutually beneficial exchange of values: an employee’s productive input for a wage or salary.
If companies are forced to pay more than employees’ productive input is worth to them, they cannot stay in business for long because their costs are higher than revenues, or simply will not hire and will have to close. Workers with the least skills and experience would suffer the most—no jobs and no opportunity to gain experience and learn skills to improve their productivity—since no company would hire them with wages above their productivity.
If employees, such as CEOs, cannot get paid due to government restrictions what their productive input is worth in the labor market, they will move to different, freer jurisdictions, as Jason Clemens and Joel Emes explain, or withdraw from the labor market altogether.
The outcome in both situations is the same: less production of material values and wealth—less human prosperity and flourishing.
Social justice warriors and governments both evade this fundamental truth: individual freedom is necessary to incentivize maximum productivity. People must be left free to interact with each other, or not, as they see fit, including trading freely. They should be free to seek any employment and to develop the requisite knowledge and skills—and compete for the best paying jobs.
The only role of governments, including in the labor markets for the lowest-skilled workers to CEOs, is to protect people against initiation of physical force or fraud. As for social justice warriors, they are free to engage in private charity and help the less productive as much as they want, instead of lobbying governments for forcible ‘redistribution’ of income from the more productive to the less productive.
If we want to reduce poverty and increase prosperity and flourishing for all, a good place to start is to demand more freedom and to oppose CEO pay caps and minimum wages.