Income Distribution

Switzerland is currently witnessing an intense and increasingly emotional debate on income distribution. Political campaigning and ever louder calls for more “social justice” have created the widespread impression this is a country of stark economic and social contrasts – with the proverbial gap growing ever wider. In fact, the portrayal doesn’t stand up to objective analysis.

Indeed, the truth is more to the contrary: By international standards, Switzerland is among those countries where the spread of incomes is relatively narrow. In France, Italy and Germany, by contrast, Switzerland’s three big neighbours, spreads are all wider. Avenir Suisse’s new study catalogues some key facts and connections about Swiss income and wealth distribution. It demonstrates that increasing re-distribution and regulation are actually putting Switzerland’s currently broadly shared prosperity at risk.

A liberal and efficient labour market

Switzerland’s liberal labour market plays a decisive role. High flexibility (still) in setting wages and in employment law, along with the apprenticeship system (which itself plays a socially integrative function) means nowhere else are wages for the full time employed as evenly distributed as here. The high level of participation in the jobs market (82%) and low unemployment (around 3%) limit differences in affluence. That means the distribution of primary income in Switzerland (comprising income from wages, financial investments and rents before tax and transfers) is less imbalanced than, for example, in the Nordic countries – generally deemed paragons of egalitarianism.

Admittedly, the labour market has in recent years favoured the higher qualified. Those in the middle could only maintain their position in the distribution table thanks to more women entering the labour market. As a result, differences in disposable household income (primary incomes after tax, social security payments and transfers) have – in contrast to most countries – not widened.

Wealth distribution is less unfair than thought

The „unfair“ distribution of wealth has attracted particular criticism. But what’s been ignored is that Switzerland’s progressive wealth tax puts an over-proportional burden on the rich. Moreover, tax data exclude savings accumulated under the second and third „pillars“ of the pensions system, and register property (whether for own use or rental) at 60% of actual value. This missing half of private wealth is distributed significantly more evenly.

In the long term, economic growth is more important for the welfare of the lowest earners than how income is distributed. Here, too, Switzerland comes out well. On a per capita basis, real income has risen by 17.7% since 1998. Everyone has benefited from this growth, but the poorest households have done so disproportionately in percentage terms. By contrast, further re-distributive measures and interventions in the market would create a vicious circle: such policies reduce the incentive to work, to save and to invest, curbing growth. And that in turn would prompt calls for further “redistribution”.

The Swiss trade union federation’s demand for a minimum wage of CHF 22 an hour (or CHF 4,000 a month) would saddle Switzerland with the highest wage floor in Europe, whether measured against the mid-point on the earnings scale or in terms of purchasing power. Such a move would seriously damage Switzerland’s flexible labour market and would, in the long run, be against the interests of the lower qualified. A minimum wage both reduces demand for unskilled jobs and increases competition between the low paid and slightly better qualified workers.