Low inflation expectations and restraint curb wage growth

Wages in Switzerland may rise somewhat more vigorously in the next few years. There are various factors holding back wage growth, however. Some of these are created by the employers themselves, but others are structurally based. The reason behind why employers do not really have much more in their wallets.

Wages in Switzerland have hardly risen in recent years

On average, nominal wages in Switzerland have risen less than 1% per year since the financial crisis. In 2017, this figure was a mere 0.4%. This is the second biggest rise since wages started to climb. The same scenario can also be seen in the EU and the US. Wage growth has been cut in half on both sides of the Atlantic.

However, purchasing power has increased in Switzerland. The financial crisis and the euro crisis have caused the price level to taper off. When adjusted for inflation, real wages rose more sharply between 2009 and 2016 than they have since the late 1970s. The price level has been rising again since 2017, however, meaning that last year's average real wages actually fell slightly. Nominal wages will need to grow more vigorously in order to produce higher real wages.


Nominal wage growth has lost momentum again

Nominal wage growth in %

Source: Swiss Federal Statistical Office, Credit Suisse

Wages fail to climb despite low unemployment rate

The Phillips curve provides a meaningful picture. It shows the relationship between wage development and the unemployment rate. The Phillips curve has been steadily approaching the origin since the mid-1990s, and has even become significantly flatter of late. Nominal wages now appear to be responding less dramatically to a falling unemployment rate than in the past.


But why is this? There are two main hypotheses. First, employers have apparently become accustomed to a stagnant or even falling price level and are anticipating low inflation. Second, employers are not managing to achieve wage growth despite a tighter labor market. They have less bargaining power.


Phillips curve is flatter

Change in nominal wages vs. unemployment rate in %.
Phillips curves: 1994–1998 gray, 1999–2004 blue, 2004–2009 teal, and 2010–2017 magenta

Source: Swiss Federal Statistical Office, State Secretariat for Economic Affairs (SECO), Credit Suisse

Impact of digitalization and migration on wages

Structural factors with an effect on wage development notably include automation, digitalization, and outsourcing. The extent to which such changes impact wages over the long term is difficult to assess, however. For instance, although automation and digitalization increase the pressure on certain workplaces and thus on wages, general wage levels rise concurrently since new jobs in high-wage fields are created. Outsourcing also tends to affect positions with lower wages.

There is also controversy over the extent to which easier migration has an impact on Swiss wages. The federal government's report on the agreement with the EU concerning free movement provides evidence that no general and direct wage pressure is created by migration. Migration has hindered steeper wage growth on the upper end of the wage scale, however. 

Low inflation curbs wage growth

As a result, Credit Suisse economists do not consider the latest flattening of the Phillips curve to be primarily due to structural changes, but rather due to inflation expectations. These have fallen further since the financial crisis and have become entrenched at low levels. And this is unlikely to change much in the near future. Both the surveys and the low interest rates suggest this is the case. 


Inflation expectations are deeply entrenched

Survey-based assessment of consumers, index

Source: State Secretariat for Economic Affairs (SECO), Credit Suisse

Wages could gradually increase

Although the Phillips curve has flattened, it is not horizontal. If the economic recovery continues as anticipated, wages could gradually increase as the labor market tightens further. Real wage growth of just over 1% seems realistic. In years with surprisingly low inflation, real wage growth could also be significantly higher.

Development could also be held back, however. After all, wage restraint is deeply entrenched in Switzerland. The margin of distribution for wage policies is still not being utilized systemically. Employees in Switzerland generally appear willing to forgo maximum wage growth over the short term in order to reduce the risk of unemployment and thus ensure their long-term prosperity.

Wage growth of 1% in 2019

Making a projection is difficult given the factors that are curbing wages. It is easier to predict developments for the year to come. Nominal wage growth should be somewhat higher than in 2018. The projected 0.7% inflation could inhibit real growth, however. For 2019, Credit Suisse economists are anticipating nominal wage growth of 1% and real wage growth of 0.3% overall.