About two weeks ago, the Swiss voted in a referendum to decide whether or not to set the national minimum wage to 4000 CHF a month, or roughly 22 CHF per hour (that’s $24.65 minimum). Not surprisingly, the measure was rejected by a large margin, with 76% of voters saying NO to the initiative, which would have otherwise made Switzerland the country with the highest minimum wage in the world.
Presently, there is no minimum wage in Switzerland. However, Neuchâtel, one of Switzerland’s 26 cantons, will be the first to adopt a minimum wage, setting it to 3640 CHF per month, or 20 CHF per hour ($21.75) – not too different from the proposed national minimum wage. The canton of Jura also recently voted to introduce minimum wages in every sector, which will later be determined based on the median national salary in each sector. Similar initiatives are underway in Valais and Ticino but have met resistance in the cantons of Vaud and Geneva.
Some businesses have also begun to raise their employees’ minimum salaries, with discount grocery store Lidl raising it to 4,000 CHF this year and clothing retail chain H&M set to pay its employees the same by next year.
The buzz around this referendum and other similar debates elsewhere in the world led me to wonder: how catastrophic can raising the minimum wage be for an economy (local or national), and can it actually be beneficial, both in the short term and the long term? I use the U.S. here as a point of reference.
Arguments on Minimum Wage in the U.S.
Over in the U.S., Seattle’s mayor announced earlier this month that the minimum wage would be gradually raised to $15 over the next 7 years. Some believe that this will actually hurt Seattle’s local economy, leaving businesses unable to absorb cost increases without firing some workers – regardless of the measure’s gradual implementation. The reason for this, cites Jeffrey Dorfman, is that “many workers are not worth $15 per hour, as proven by the fact that they are earning less than that amount now.” I find this statement problematic for various reasons but mainly because I do not believe a worker’s wage is indicative of his inherent ‘worth’ but rather that paying them higher wages means less profits for their employers.
In his Forbes article, Dorfman does makes some valid points, however. For instance, those that are earning higher wages “will lose food stamps, some or all of their earned income tax credit, and other means-tested federal benefits.” For some low wage workers, this federal aid is vital to their survival from pay period to pay period.
Dorfman also references the growing tendency of McDonald’s to install automated ordering systems in its locations to replace workers. At least here in Europe, I have seen these automated machines in just about every McDonald’s I have visited. In the U.S., they have not gained a strong foothold because McDonald’s believes its customers there prefer the human interaction. Yet, with growing discontent and pressure from its own workers to raise the minimum wage to $15 per hour (costing McDonald’s 60 percent more for its workers), Dorfman foresees McDonald’s feeling more inclined to opt for automated systems. Undoubtedly, millions of low wage fast food workers would be adversely affected by such an initiative, those working for McDonald’s and others alike.
Yet, as I read more about the implications of raising the minimum wage, I find that those against it usually subscribe to the same argument, without little proof to back up their statements: If the minimum wage is raised then (1) business owners will have to downsize, (2) they will also hire less, and therefore, (3) unemployment will be higher and (4) the younger, more inexperienced, who are just entering the workforce will have greater difficulties doing so. These all seem like logical and valid arguments but where are the hard facts to support these claims?
In his opinion piece for Al Jazeera America, David Cay Johnson offers a review of the existing literature on wage studies, which includes a study on fast-food employment in New Jersey after raising the minimum wage (Card and Krueger), a large study on restaurant and bar workers spanning multiple years (Addison, Blackburn and Cotti), and another study that collected employment and wage data from 1990 through to 2006 (Dube, Lester and Reich). All three studies found no negative effects associated with raising wages – even after taking into account overall changes in local economies and other effects, such as recessions and expansions.
Only one pair of researchers seems to have found that raising the minimum wage is harmful (Neumark and Wascher). Unfortunately, these two tend to be the most cited in isolation (see, for example, this Forbes article). Johnson discredits Neumark and Wascher’s research for failing to review other thorough studies, essentially cherry-picking the studies which best supported their own conclusions. Johnson goes on to say that Neumark and Wascher’s research is only widely regarded as legitimate because of its endorsement by the Employment Policies Institute, which is allegedly headed by Richard Berman, a strong advocate for the restaurant industry. Somehow this doesn’t seem like a coincidence to me.
Instead of picking sides, I believe a little nuance is necessary. As shown by Bryce Covert for Think Progress, although the Congressional Budget Office’s recent report found that higher earnings resulting from raising the minimum wage to just $10.10 per hour would lift 1 million people out of poverty, such increases would also reduce jobs slightly (or by 0.3%). The report attributes the job losses to increased prices and lowered demand as well as to some employers using more machines and technology, and less workers (just like McDonald’s).
Still, Covert makes reference to John Schmitt’s research, from the Center for Economic and Policy Research, which claims that employers would likely benefit from a lower turnover rate; replacing someone is actually quite costly (as much as 20 percent of that person’s salary). And despite job losses, there would still be an “economic net gain,” as workers will have more to spend (therefore increasing household spending by $28 billion). I am reminded here of former U.S. Secretary of Labor Robert Reich‘s own claims about the importance of a strong middle class with money to spend, which is what he views as the ultimate driving force in any economy.
What This All Means for Switzerland
In a Q and A session with swissinfo.ch, Yves Flückiger, Director of the University of Geneva’s Employment Observatory, explains where he thinks the minimum wage debate originated: from the suspicion that “wage dumping” was taking place in Switzerland, brought on by Swiss-EU bilateral accords. Wage dumping, derived from the German Lohndumping (and wrongfully so, according to this linguist), refers generally to the practice of “offering excessively low wages.” Although Flückiger doesn’t personally believe this is a problem in Switzerland, some of swissinfo.ch’s readers would say otherwise (see the first response).
Flückiger also believes that it is difficult to make international comparisons using the studies already conducted since they are examinations of “varying national contexts with extremely varied job markets and minimum wages.” The only true comparison to be made is that Switzerland’s proposed minimum wage is at a much higher level, representing two-thirds of the average Swiss monthly salary (6,000 CHF).
One must also take into consideration the disparities that exist within Switzerland, says Flückiger. Setting the minimum wage at 4,000 CHF will have much greater impact on regions that already have low average salaries (i.e. Ticino, 5,400 CHF per month) than those that have higher average salaries (i.e. Zurich, 6,500 CHF per month). By the same token, setting the minimum wage at 4,000 CHF will signify a salary increase for those working in the low-paying sectors, but could result in employment issues – such as for those in the services and hotel and restaurant industries, where the average monthly salaries are just 3,700 CHF and 4,100 CHF, respectively.
What Flückiger considers the real issue is not so much introducing a minimum wage, but introducing a fixed national minimum wage despite having “regions with very different cost of living realities.”
The referendum should have asked, “Should Switzerland set a minimum wage?” and not “Should the minimum wage be set to 4,000 CHF per month?” The canton of Jura should serve as a model for the rest of the country.
That being said, the Swiss should consider revisiting this issue and treating it with a bit more subtlety. Setting a national minimum wage would have a big impact on a select few that are currently living at the margins, about 330,000 mostly female low-wage workers and in Neuchâtel, 2700 workers, as most workers in Switzerland already make more than 4000 CHF per month. Flückiger and the Organization for Economic Co-operation and Development (OECD) recognize the positive impact a sensible minimum wage will have, “especially for single-parent families.”
Having been raised by a single mother and on the U.S. minimum wage, I can attest that a low wage is not a living wage. In Switzerland this is also the case. Just consider Geneva, where the average a person pays for rent is about 2000 CHF – that would be half of a minimum wage earner’s monthly salary.
I leave you with some referendum propaganda: