IMD International

The Swiss minimum wage debate

The impact on job creation is unclear, says IMD Professor Arturo Bris

May 1, 2014

As a foreigner living in Switzerland, I can only admire the upcoming May 18 vote in which the Swiss will decide whether to impose a minimum salary of 22 francs per hour. This is democracy at its best because citizens are asked to, and are allowed to, decide on a major issue, relevant for all. It is also pure democracy because voters can shape their future in the way they want.

But arguments for or against the Swiss minimum wage initiative cannot be based on its possible impact on job creation. Academic research into the relationship between a minimum wage and unemployment is not conclusive and can be summarized as follows:

·   For countries or regions with a minimum wage already in place, increasing the minimum wage leads to more unemployment among less skilled workers.

·   But in general there is no conclusive evidence of a negative relationship between employment and minimum wages. Among the hundreds of articles that have empirically analyzed the link, some find a positive impact and some a negative relationship. In some settings, when the minimum wage is way below the equilibrium wage of the economy, the impact of minimum wage legislation can be negligible.

·   To my knowledge, only a handful of academic studies have analyzed the impact of introducing a minimum salary in a country or region. They conclude that the introduction of minimum wages[1] is not significantly related to the level of employment, even for young and unskilled workers who might be most affected.

This would suggest that the arguments supporting a "Yes" in the May 18 vote should be based solely on fairness considerations—and these are fundamentally based on personal convictions. Voters who think that governments should preserve income equality and minimum living standards, even at the expense of the future competitiveness of an economy, should vote Yes. Those who strongly believe in markets and think that any constraint on market mechanisms is detrimental to the optimal, redistributive role of the labor market, should vote No.

Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center. He is a keynote speaker at IMD's Orchestrating Winning Performance program in Lausanne, which runs from June 15-20.

[1] Stewart, Mark B. (2004), "The Impact of the Introduction of the UK Minimum Wage on the Employment Probabilities of Low Wage Workers," Journal of the European Economic Association 2, 67–97.

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