Swiss Referendum on Introducing the World's Highest Minimum Wage

Most of our readers probably know what we think of minimum wages, but let us briefly recapitulate: there is neither a sensible economic, nor a sensible ethical argument supporting the idea.

Let us look at the economic side of things first: for one thing, the law of supply and demand is not magically suspended when it comes to the price of labor. Price it too high, and not the entire supply will be taken up. Rising unemployment inevitably results.

However, there is also a different way of formulating the argument: the price of labor must not exceed what the market can bear. In order to understand what this actually means, imagine just for the sake of argument a world without money. Such a world is not realistic of course, as without money prices the modern economy could not exist. However, what we want to get at is this: workers can ultimately only be paid with what is actually produced.

As Mises has pointed out, most so-called pro-labor legislation was only introduced after enough capital per worker was invested to make the payment of higher wages possible – usually, the market had already adjusted wages accordingly.

However, unskilled labor increasingly gets priced out of the market anyway, which is where the ethical argument comes in. If a worker cannot produce more than X amount of  goods or services, it is not possible to pay him X+Y for his work. Under minimum wage legislation he is condemned to remain unemployed, even if he is willing to work for less.

 

In Switzerland, the unions have recently managed to get the demand for minimum wage legislation on one of the quarterly referendums in the country. An interesting point has been brought up by one of the opponents in the course of the debate, but first a little background information:

 

“Jasmin Eicher has already axed her sole full-time employee to keep afloat her shop selling cards, candles and paper in a Zurich suburb. If Switzerland approves what would be the world’s highest minimum wage, she says the only option would be to close her door.

The Swiss will vote in a national referendum May 18 on whether to create a minimum wage of 22 francs ($25) per hour, or 4,000 francs a month. While about 90 percent of workers in Switzerland already earn more than that, employers say setting Switzerland’s first national wage floor would push up salaries throughout the economy. When adjusted for currency and purchasing power, it would be the highest minimum in the world.

“We couldn’t pay it,” said Eicher, standing behind the counter in her shop in Schlieren. The employee she let go earned 3,500 francs a month. Now she’s by herself, working 10 hours a day, six days a week, and her hopes of hiring a cheaper helper would be dashed if the proposal passed.

“Of course I understand about people not earning enough, but not everyone is worth 4,000 francs. Here in Switzerland we’re already so well-off,” she said.

The chief backers of the proposal are Switzerland’s biggest trade unions, which argue that pay levels need to reflect the country’s prices — among the world’s highest.”

[…]

George Sheldon, professor of economics at the University of Basel, said the Swiss proposal would be counterproductive.

“Unemployment among the unskilled is increasing,” he said in a phone interview. “The solution to their problem can’t be to make them more expensive.”

 

(emphasis added)

So, 90% of all employees are already paid more than the proposed minimum wage. It turns out that virtually all the biggest companies pay salaries above what would be the world's highest minimum wage – but that is not the main problem.

 

Who Would Lose Out?

The point we actually wanted to get at is touched upon in the following excerpts:

 

“Despite being home to multinational corporations such as KitKat-candy-maker Nestle SA and drugmaker Novartis AG, Switzerland gets two-thirds of its employment from small and medium-sized enterprises.

The Association of Swiss Cleaning Companies, Allpura, opposes the minimum wage, saying it would lead to job cuts and worse working conditions. It says employees in the sector earn between 18.50 francs and 26.50 francs per hour.

Big companies including Nestle, Novartis and Swatch Group AG are against the measure too, saying it will hurt the economy.

“State intervention in the liberal economic system also goes against the market economy principles of our society that have been so successful to date,” Novartis spokesman Dermot Doherty said via e-mail.

At Nestle, the wages of all Swiss employees are above the proposed minimum, spokesman Philippe Aeschlimann said. “A higher cost of labor would however affect companies in our supply chain and our Swiss customers,” he said via e-mail.

[…]

“A minimum wage won’t stop poverty,” Economy Minister Johann Schneider-Ammann said at a press conference in Bern in February. “This new system could be counterproductive.”

According to Boris Zuercher, head of the Employment Directorate at the State Secretariat for Economic Affairs, the uniform wage would get passed on to consumers in the form of higher prices and will ultimately result in job losses among low-wage earners. Workers earning between 4,000 and 6,000 francs a month — 40 percent of the full-time workforce — will seek higher pay too, he said.

“The main criticism is that it’s an enormously high minimum wage — it would be the highest internationally,” Zuercher said, speaking by phone from Bern. “It’s not a question of Novartis or UBS not being able to afford to pay 4,000 francs, but some little company in a remote valley.”

By contrast, the Swiss Federation of Labor Unions says a minimum wage wouldn’t lead to higher unemployment because it would mostly affect domestically-oriented sectors where outsourcing isn’t possible.”

 

(emphasis added)

The first salient point is the fact that once this new minimum wage law is introduced, upward pressure on all wages would likely ensue. Note in this context that Switzerland is awash in newly created deposit money due to the ministrations of the SNB, which is manipulating the Swiss franc's exchange rate (a few charts on Swiss monetary inflation over recent years can be seen in our article 'How Safe is the Swiss Franc?'. The article is slightly dated, but it still serves to illustrate the point). So there is no brake on prices and wages due to  a lack of money supply inflation – rather the opposite. Naturally, wages would not be the only thing rising under these circumstances – prices would be adjusted accordingly, and in the end the purchasing power of the higher wages would not be greater than before.

The second important point is the one about which enterprises would suffer the most on account of such legislation. When the union official cynically comments that 'only businesses that cannot be outsourced will be hit' (i.e., those who cannot vote with their feet and simply flee), he forgets to mention that small and medium-sized companies as a rule cannot 'outsource' their operations either, almost regardless of what they are producing. We felt reminded of something a friend of ours mentioned to us recently: “The problem of today's form of capitalism is that there are not enough capitalists:”

Indeed, an individual entrepreneur running a small business has a very difficult life already, as every new imposition is much harder to overcome for a small business than it is for a large corporation. This is also why we often find that big corporations don't resist new regulations: they reckon they are likely to keep competition from upstarts at bay. It is laudable that several big Swiss corporations are evidently not following this trend.

If Swiss voters agree to introducing a new minimum wage law, they would end up doing incalculable damage to Switzerland's entrepreneurial culture. At the moment, Switzerland is still one of the freest economies in the world. It has been extremely successful so far and its achievements would clearly be put at risk. Hopefully Switzerland's voters won't be swayed by union's arguments.

 

 
 

 
 

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12 Responses to “Are the Swiss Going Crazy?”

  • Crysangle:

    WoodsBP .

    · ” … there is neither a sensible economic, nor a sensible ethical argument supporting the idea.”

    Incorrect on both counts.

    – You know PT is not in favour of the modern fractional system , hence MW in that circumstance comes across only as an effort to mitigate the imbalances created and would not stand under a solid currency system . As for an ethical argument, it is good ethic to help out another , it is called charity , but that cannot be imposed . On the other hand , if someone came along and told me ‘you are worth at least so much an hour ‘ , you know what I would tell them , not just because I would find that form of trivial and uninvited valuation insulting, but if I were unemployed and unable to find work at that price they would simply be seen to be in academic wonderland . Furthermore , if I were offer my time for a wage and I was refused , I would then have to calculate whether my mixture of experience was not suited (as per the potential employers reply) or whether it was not valued at the MW. I would be guessing and would not know how to choose to adapt … just one more layer of confusion for all .

    · There is no Law of Supply and Demand. Sure, there is a theoretical assertion about a possible causal relationship between what a Demander is willing, and able, to pay, and what the Seller is willing to accept – for a good or service. So, nowt can be suspended, since nowt exists.

    – We live essentially under an imposed monetary system . Using that , instead of focusing on the bid/offer spread to define possible causal relationships , try charting demander willing to pay x axis and seller willing to accept y axis, at 0 to 1000 for both (or infinity if you prefer) . Guess what , the chart plots a perfectly neat line of transactions taking place , those would be real transactions and un-assailable . I expect you would understand the competitive arrangements that force those transaction prices higher or lower . If you wish to start influencing how much people are ‘willing or able’ to pay by law then in my opinion you are adding to the “human folly, chicanerey and fraud” .

    · So, its all about innumerable pieces of string of indeterminate lengths. And, where you wish to place individual sentient humans upon those pieces of string.

    – You are speaking from a managerial position , in fact you are advocating that labour be fixed at a (minimum) set length of string . If you run a company you would be able to cost wages out of predicted profits , but you are taking the stance of the economy as a whole being one business where the length should be predetermined . You are telling an employee how much they should not be paid . This is the inconsistency of your argument , although you laudably see through the virtual financial sector for what it is you then try to use that as a justification to impose new laws as a recompense to the citizen – in short you are selling, willing to impose , inviting the public to sanction and ultimately finance (cost feed through) , that total reality . For those that are employed they might like the idea of a raise , potential future employees might think it is a good protection to have their efforts minimally priced . However you might not forget that money that is NOT spent on wages , company profits if you will , is inevitably reinvested into the economy to fund activity . Even if they are thrown into the cesspit of bank savings to be tarnished as fractional guarantees, so amplifying the potential monetary multipliers , once hard assets are priced and paid for in the virtual competition of valuation, that money will still try to find its way to something actually productive . Are you trying to tell me that adjusting wages to the virtual finance world as it trickles down into the real world prices is the answer ? I would say you are trying to monetize the virtual financial world , you are encouraging it . Now let us look at the other side of your equation . On the one hand some workers are paid more and society feels ‘taken care of ‘ . or duped if you were cynical. What about the people who have to pay for the rise in prices that result from this new law, those that have saved for example ? What about those that do not find work (unquantifiable) because business moves elsewhere ? You will end up having to increasingly control the entire economy to try and make sure that all the odd lengths of string fit , is that your idea ? What PT is saying is that the economy must by itself fit with the existing messy set of parameters that is the real world , that each persons non standardized ability is to be appreciated for what it is , with some coming out short and others better , not because there is only one size available , but because that is experience . As soon as you take away this individual ability to decide you are building walls. It is a very efficient way to failure , I hope you would keep that to yourself and not encourage imposing it on others .

    · Any argument or assertion about an income (howsoever you define it) has to proceed from a pre-existing mindset.

    – Try ‘ How much you gonna pay me ?’ . It is called price discovery , and both parties have a good sense of their own current real world parameters .

    · This is silly. “If Swiss voters agree to introducing a new minimum wage law, they would end up doing incalculable damage to Switzerland’s entrepreneurial culture.”

    – Maybe . If you consider that the law might be interpreted as a wider movement towards control of the Swiss economy , you might decide to readjust how you run your business there though … only an element of doubt is necessary to change sentiment .

    · Please state, at least a couple, of plausible outcomes of a hike in the MW which would indicate that ‘incalculable damage’ had occurred.

    – False dilemna , we cannot compare the outcome of two seperate routes (with/without intervention) to judge the most successful , as we will only have one to witness .

    · Start with a Null Hypothesis. “No income is required (by humans).” Now observe an actual situation populated by humans. The economic and ethical rationale will appear quite quickly – or should do.

    – The rationas exist throughout nature , people use written statements and word, some creatures use scent , others visible recognition , physical combat etc. etc. etc. The main difference with mankind is its ability to fully shape its surroundings to its liking instead of merely occupying them, which gives rise to a different set of criteria on which to act and organize .

    · Both Ethics and Sense are arbitrary, highly individualistic value concepts. Hence, intensely arguable and subject to circular disputations.

    – May it remain that way , including over wages. At least the Swiss hold referendums , in other countries laws like these are passed by decree .

    I state out of courtesy before posting that this is all my contribution to this discussion and I will not answer any reply .

    • woodsbp:

      @ Crysangle: “I state out of courtesy before posting that this is all my contribution to this discussion and I will not answer any reply.”

      Noted.

  • woodsbp:

    Hi, andee.

    Virtual Surplus? Sure there are – aka: Quantitative Easing/s – and look how that is working out! The Economy – which is an abstraction, which WILL work whichever way I BELIEVE it will work!!! And my belief systems are …. Depends, depends.

    I read Hazlett in 2009 when I was an economics undergraduate (I’m actually a career biochemist). “Good, but not great”, as the football commentators say. Try Gustav von Schmoller. That will set your teeth on edge. I am unable to locate his 1870s paper. But I will post a reference if I can.

    Think of our economies, not as free-wheeling gyroscopes, but as gearboxes. Another unpleasant and inconvenient truth is the intellectual ideology of obdurate and arrogant Occidental economists (aka: Anglo-Saxon). These Useful Idiots know, with Celestial Certitude, that they MUST be right! Now that has not worked out very well either, now has it?

    Cheers. Brian.

    • andeeh:

      Ok, we obviously would agree that nobody can create wealth by printing money, but maybe it’s semantics but you seem to be a little mixed up. QE could be a “virtual surplus” as you suggest, but of course the money that is printed can only be described as a surplus of some kind to the extent that it can be used to buy goods and services; those goods and services being from the real economy, where somebody had to produce something. So really, the creators of vitual surpluses are just freeloaders and theives. That’s why I said there is no such thing as a “virtual” surplus.

      You said previously that there is no such thing as supply and demand and now you say that the economy is an abstraction. You seem to be confused. To suggest that the physical world of exchanges is an abstraction, well that is patently absurd. You are basically conflating the unit of account and bookkeeping with the actual economy. Say I have six pineapples, if I write “six pineapples” on a piece of paper I have an accounting abstraction, but go to my cupboard and you will surely find six pineapples, no?

      I prefer to think of our economies as the sum total of all of the hopes, fears, desires, actions past and present… of everyone and their resulting actions to produce or consume goods and services. Now do you really expect that you are going find somebody on here that doesn’t lament the condition of modern economics as a discipline? You should read a few more articles on the blog rather than trying to tell us something we knew already.

      • woodsbp:

        @ andee, thanks again.

        “the money that is printed can only be described as a surplus of some kind to the extent that it can be used to buy goods and services; those goods and services being from the real economy, where somebody had to produce something.”

        How about virtual financial products – the costless creations (and creatures) of costless virtual credit? OK., I’ll buy your argument if you are restricting yourself to real goods and real-time services of Production-Consumption economies, not Financialized economies. The formers are faltering, the latters are in the ascendant. That’s why we have a problem with real incomes. Too many folk, not enough real economic surpluses to go around.

        ” … the creators of vitual surpluses are just freeloaders and thieves.” They sure are! And are common features of some Central Banks and Financial Centres!

        Supply and Demand can exist in either a theoretical (abstract) or real form. The abstract version is based on logical arguments and mathematical expressions. Its neat, tidy, un-assailable. The latter is not. Its very messy, subject to all manner of human folly, chicanerey and fraud. That’s why we have (or should that be, had) a Rule of Law.

        “You should read a few more articles on the blog rather than trying to tell us something (that) we knew already.”

        Thank you for your opinion. I’ll endeavour to persevere. But I already visit this site on a daily basis. And read all the postings. Mostly I have little comment on the postings – they appear quite sensible (in my opinion). But this one is quite sub-standard (in my opinion). We all have our off days!

        Cheers, Brian.

  • woodsbp:

    @ jks: Thanks for that comment. Your experience with a MW scene should alert you to the inability of our Permagrowth economic paradigm (the Production/Consumption part of it) to continue to ‘grow’ and we will all be happier – or whatever the economic theorists assert will occur. It will not, because it cannot.

    The actual question that needs to be asked is – “Whence an income?” “And, how much?”. The distraction with the concept of waged-labour rates is just that, a vacuous distraction.

    “Minimum wage laws do nothing to create more wealth.” Creating ‘wealth’ is not the function of wages nor salaries – they are paid out of an economic surplus, whether that surplus be real or virtual. So, now you have to think about how an economic surplus is actually generated. The virtual ones are magically simple – simply emit virtual credit as often and as fast as required – like now! Real ones? I believe there is a significant problem here. Which is why ….

    Thanks again, Brian.

    Hazlett? Now he would not be another one of those economic theorist associated with the Pol Pot Academy for the Advancement of Austerity Policies for the Dissemination of Poverty? Not a chance! Naw!

    Try Frederick Soddy – ‘Wealth, Virtual Wealth and Debt.’ At least he was a genuine science Nobel Laureate – before he turned on economics. Veblen is good too.

    • andeeh:

      “Whence an income?” “And, how much?”

      Agreed, as someone that’s run a business and paid an employee out more than I took home, that was an important question. We needed to produce an real economic surplus so we could justify our existence, had no time for vacuous distractions. I think the Hazlett book might be of some help to you, if you can stand the idea that the economy doesn’t always operate according to how you think it ought to. There’s no such thing as a “virtual suprlus” of course, which is why… which is why you need to work and produce in some way in order to improve the lot of everyone.

  • woodsbp:

    ” … there is neither a sensible economic, nor a sensible ethical argument supporting the idea.”

    Incorrect on both counts. But I’ll let it go.

    This one I won’t. “… the law of supply and demand is not magically suspended when it comes to the price of labor.”

    There is no Law of Supply and Demand. Sure, there is a theoretical assertion about a possible causal relationship between what a Demander is willing, and able, to pay, and what the Seller is willing to accept – for a good or service. So, nowt can be suspended, since nowt exists.

    This is silly. “If Swiss voters agree to introducing a new minimum wage law, they would end up doing incalculable damage to Switzerland’s entrepreneurial culture.”

    Please state, at least a couple, of plausible outcomes of a hike in the MW which would indicate that ‘incalculable damage’ had occurred. No rhetoric. Verifiable facts; OK!

    Folk, who do not live in the country and own enough land to feed themselves and their stock, need an income to procure their necessaries – and if Dr Smith and Paul Samuelson are to be believed – have a little left over to save or savour. So, please state how that income might be forthcoming. Whose An Randy, by the way? Has her own TV Show? Good cook then?

    Wage rise => goods and services rise?, or might it be the other way about?

    I am not impressed with this posting. Please try again. Its an important topic.

    Brian.

    • No6:

      Just out of interest I would love to know what you believe is the sensible and ethical argument for a minimum wage.

      • woodsbp:

        No6.

        Any argument or assertion about an income (howsoever you define it) has to proceed from a pre-existing mindset. So, its all about innumerable pieces of string of indeterminate lengths. And, where you wish to place individual sentient humans upon those pieces of string. Agreed?

        Both Ethics and Sense are arbitrary, highly individualistic value concepts. Hence, intensely arguable and subject to circular disputations. Agreed?

        Start with a Null Hypothesis. “No income is required (by humans).” Now observe an actual situation populated by humans. The economic and ethical rationale will appear quite quickly – or should do. Caution: you may need to suspend some of your pre-existing beliefs.

        Cheers, Brian.

    • jks:

      Brian, minimum wage laws = guaranteed unemployment laws. This isn’t conjecture or speculation. I’ve seen it first hand. When I was a minimum wage worker, the state raised the minimum wage and my employer was forced to let two of my colleagues go. I got a little more money, but I had to work much harder. Minimum wage laws hurt the economy by raising unemployment, or by raising prices which makes everyone poorer, or both.

      If minimum wage laws help an economy, why not raise the minimum wage to 100 francs/hr? What would happen? Prices would quickly go up and nobody would be wealthier. In the end, the only way to create more wealth is to create more wealth. Minimum wage laws do nothing to create more wealth.

      See Henry H. Hazlitt’s “Economics in One Lesson” for further discussion on how minimum wage laws hurt economies on pg 115. Free download:

      http://mises.org/books/economics_in_one_lesson_hazlitt.pdf

  • Kreditanstalt:

    Sure, “the price of labour must not exceed what the market can bear”. Says logic. Says the free market…

    But we’re dealing with benevolent do-gooders and world-improvers here. Crusading socialists. Central planners, infused with religious zeal, a la Fabian socialism, Pope Francis, and Social Gospel-ism. Coupled with Judeo-Christian prudity, this means: Money is the Root of All Evil. The usual visceral hatred of ‘unfairness’ and ‘inequality’…

    Thus, they HATE profits. They’re not “rigging the price of labour”; they’re outlawing profits! (Good luck with that…!)

    “If workers struggle for higher wages, this is hailed as ‘social gains’; if businessmen struggle for higher profits, this is damned as ‘selfish greed.'” ~ Ayn Rand.

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