The swiss rejection of the minimum wage was the right thing for prosperity

3 mins. to read

It is hard to believe that barely more than a few hundred miles from the utopia that is Switzerland that countries like Greece, Portugal, and Spain have great swathes of their populace struggling to find a job where they barely earn €5 per hour. In the unique country that is Switzerland however the median pay is so high that they don’t even care about a “minimum wage” and unemployment is a word that barely registers in their dictionary. 

Last Sunday the Swiss people voted on a referendum in which they rejected a proposed minimum wage of 22 francs an hour (£14.66). For now, Australia and France will keep their top positions at the minimum wage list as the table below illustrates.

If approved, the Swiss would have seen their wage guaranteed at a minimum of 22 francs per hour, which is, amazingly, more than triple what American’s receive and nearly two and a half times what those in the UK. The referendum was promoted in response to concerns that the country’s poorest citizens were being underpaid. The arguments in favour and against are vast and it is difficult to demonstrate whether the minimum wage anywhere actually leads to an improvement or is in fact part of the problem. Proponents of the policy say that it protects the worst paid by guaranteeing them a minimum “living” salary, while those against the policy (generally companies!) retort that it actually only detriments the population in aggregate through creating higher unemployment with employers simply deciding to not employ them or to choose more skilled workers at the detriment of the unskilled, and who are usually coincide the poorest citizens. 

Denmark, Germany, Italy, Norway and Sweden are all examples of countries where there is no minimum wage. Northern European countries in particular it seems prefer to let the bargaining power between workers and employers do its job.

Swiss government ministers argued against the implementation of the minimum wage, stating that it would damage the economy, running small companies out of business and making it harder for young people to find employment. We have sympathy with this view in that the minimum wage implementation creates a distortion in the labour market through artificially raising the equilibrium wage that natural demand and supply would create. This means that at a new minimum wage level there is excess supply. What does excess labour produce? Yes, unemployment. Some people would be willing to work for less money but under the minimum wage regime they cannot. This in turns hits disproportionately young people who have yet to acquire the skills to raise their wage bargaining capacity. The lack of flexibility created by the minimum wage is one of the reasons why it takes so many years for employment to recover after an economic recession and it also helps explain the huge high unemployment rate levels we are now experiencing in some European countries for the youngest people. 

I believe that it would be better if a government could promote full employment by creating the right conditions for companies to invest in an economy, instead of trying to manage the equilibrium price of the labour market. In the case of the Swiss economy where unemployment is at a lowly 3.2% and the median wage near 33 francs (£20/hr), it would be senseless to implement such a measure. Even if the argument of some workers being underpaid is true, it would be better to directly compensate them with some subsidy rather than creating a distortion in the whole market. But, of course, the Swiss are an extreme case. The bargaining power between workers and employers is often unbalanced in many countries which, when mixed with high unemployment rates, results in working conditions that seem like a second generation of slavery rather than good paying work. For the sake of flexibility, the absence of a minimum wage actually helps the market to more rapidly adjust. 

Filipe R Costa

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