Minimum wages aren’t always bad for the economy

The minimum wage is back on the policy agenda worldwide. Will Switzerland become the latest country to introduce this change?

Swiss workers could receive the world’s highest minimum wage if voters accept on May 18 a proposal, that, while revolutionary for Switzerland, has already been introduced in many countries. Patrick Belser, a wage specialist at the International Labour Organization, says it carries a minimal cost if applied properly.

The proposed minimum wage would be regularly adjusted after consultation with stakeholders. It would also be automatically indexed on to the evolution of wages and prices, and increases would be pegged at the very least to any hike to in pensions.

Patrick Belser

Patrick Belser is a Swiss senior economist at the ILO and principal editor of the ILO Global Wage Report. Responsibility for opinions expressed rests solely with the author and does not constitute an endorsement by the ILO.

Based on recent international experiences, what should we think of this proposal?

After years of experimentation with “flexible” labour markets across the world, the trend towards more inequality and the existence of low-paid sectors in many countries has brought the minimum wage back onto the policy agenda worldwide.

Among advanced economies, Britain adopted a national minimum wage in 1999, Ireland followed in 2000, and now Germany – traditionally opposed to the idea – has announced a national minimum wage at €8.50 (CHF10.40) starting in January 2015.

In the United States, after years of being frozen at $5.15 (CHF4.55) per hour, the rate was raised progressively to $7.25 in 2009, and to $10.10 for federal contractors this year. As would be the case with the Swiss cantons, the US states can set their own minimum wages at higher levels.

Emerging economies too have increasingly relied on minimum wages to reduce wage inequality: in Brazil after President Lula took office, in South Africa since the end of apartheid, and more recently in China, where all provinces must raise their minimum wages to 40 per cent of average salaries.

Most countries have statutory minimum wages in place. Prominent exceptions include Scandinavian nations and the Gulf states – though international pressure is mounting on Qatar, one of the richest countries in the world, where low-paid migrant workers mostly from South Asia are building the stadiums that will host football’s World Cup in 2022.

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Aren’t wages best set by collective agreements?

The most common objection to the introduction of a minimum wage in Switzerland is that wages are best set through a Collective Bargaining Agreement (CBA).

Switzerland has a long tradition of CBAs, with a multitude of sectorial agreements that  specify different minimum wage rates. The ILO considers collective bargaining, when it works well, as the best way to ensure a just share of the benefits of progress to all. It fosters social partnership, maintains a sense of common purpose, and promotes a fair distribution of incomes between workers and employers in different sectors of the economy and in different regions.

Yet, one must also be aware of the gaps.

In Sweden, three quarters of employees are members of trade unions and 90% are covered by collectively negotiated minimum wages. In Switzerland, the unionisation rate is 20%, and no more than half of all employees are covered by negotiated minimum wages.

While many earn good wages, according to the Federal Statistical Office 1.8% of full-time employees earn less than CHF3,000 per month, and 0.3% get less than CHF2,000 – all perfectly legal. Around 11.5% of employees earn less than CHF4,000.

Balancing social and economic objectives

If one accepts the need for a minimum wage, the key questions are then how and at what level. The ILO Convention 131 states that minimum wage rates should be determined in a way that balances “the needs of workers and their families” and “economic factors”, such as productivity and the need to maintain a high level of employment.

The level is usually measured by its ratio to the median wage. Among developed economies, the minimum wage usually ranges between 35% and 60% of the median full-time wage.

The CHF22 proposed by the Swiss initiative is about 60% of the median wage. As a way of comparison, the US minimum wage is about 40% of median wages, the British national minimum wage 50%, while the SMIC in France – as well as the newly announced minimum wage in Germany – are 60% of the median.

In the US and in Britain, recent research has failed to detect significant adverse employment effects. Some of the reasons are that slightly higher labour costs can, at least partly, be offset by lower turnover rates and absenteeism, as well as higher motivation and productivity. Minimum wage earners are also consumers, so the extra money they get from higher wages is usually fed back into the economy.

But there is of course a limit to what employers can pay before they start resizing their workforce. In France, where the minimum wage is relatively high, the government spends up to 2% of Gross Domestic Product in measures such as job subsidies and reduced social security contributions to lower the cost of employing those workers.

Consultation and stakeholder participation

While statistical benchmarks are useful, we have learned from the flurry of recent research – one researcher has counted 800 articles published in the English language since 1991 – that the effects of a minimum wage are country-specific: they vary depending on its design and on national circumstances. While some economies may be too weak for relatively high minimum wages, others are strong enough to absorb the shock with little overall effects.

This is where a second key principle of ILO Convention 131 kicks in, namely the full consultation and participation, on a basis of equality, of stakeholders in the establishment and operation of minimum wage systems. This ensures that the concerns and positions of both sides are balanced out and taken into account.

With this in mind, many countries have set up tripartite commissions, or technical commissions, with the participation of workers and employers, to formulate recommendations on the appropriate levels. Adjustments are then based on social dialogue after careful monitoring of the initial impacts. In Britain, the members of the Low Pay Commission are taken to an isolated hotel and consensus emerges on the basis of a presentation of all the evidence from its large monitoring programme.

From that perspective, the Swiss initiative, with its pre-set rate and pre-determined adjustment formula, certainly appears to suffer from a “social dialogue deficit” which – depending on how voters decide – may or may not need to be corrected at a later time.