How Will Switzerland Grow until 2030?
Switzerland has one of the highest per capita incomes in the world. However, whether it can maintain its standard of living over the long term depends on the future growth of the Swiss economy.
Apart from economic highs and lows, a country's growth potential is always tied to its workforce, investments in the capital base such as infrastructure and machinery, and to productivity – meaning the economic output and the underlying production factors.
Growth in Recent Years on Account of Greater Workforce Productivity
Economic output in Switzerland has grown in recent years, thanks in particular to greater workforce productivity. Especially since the introduction of the free movement of persons in 2002, we have witnessed a transition from capital-intensive to labor-intensive growth. This was one of the reasons for weak labor productivity. Developments in productivity also received little support during this period from technological advancements. Although research is strong in Switzerland, it might not have been backed by enough innovations in technology.
Although research is strong in Switzerland, it might not have been backed by enough innovations in technology.
Not Only Unproductive Sectors Are on the Rise
An analysis of productivity drivers in the market economy segment (not including the public sector) reveals that between the introduction of the free movement of persons and the financial crisis, growth in productivity was mainly driven by genuine productivity advancements within the industries. However, changes in productivity due to structural shifts in employment figures were rather low. Higher workforce output following migration did not primarily benefit industries with low labor productivity. In other words, migration does not seem to have triggered a shift toward unproductive sectors. Sectors with a high level of employment during this time also made a relatively high contribution to growth in productivity. This applies in particular to the corporate services segment, where the most jobs were created. At the same time, however, this sector was one of the productivity drivers, together with trade, transport, and logistics, as well as industries with high value creation. The sector with the second-largest increase in employment – education, health, and social services – also made a positive contribution to the development of productivity, albeit less intensively.
Productivity Is Becoming a Key Growth Driver
In the years ahead, there will be a limit to how much the workforce output can expand further. For one thing, Switzerland must implement the mass immigration initiative by 2017. For another, working population growth will decline as the population ages, and after 2020 it will be stagnating. Therefore, labor productivity will become an even more critical growth driver. To estimate possible development tracks, we have devised three growth scenarios through 2030. The main scenario assumes that due to greater investments, productivity will flourish again and pick up on the slight acceleration we are already seeing. Thanks to successful negotiations with the EU regarding the implementation of the mass immigration initiative, immigration will hover around 40,000 to 50,000 persons annually by 2020. At the same time, we have managed to mobilize the domestic labor potential, in particular by increased employment of women and older workers. The "low" and "high" scenarios show the spectrum of potential developments in the absence of productivity advancements and immigration-related growth impetus – for instance, if the country manages to spur higher growth by launching more innovations and improving the workforce potential.
Switzerland's growth potential in 2015
According to our estimates, Switzerland's growth potential is currently around 2 percent. By 2020, this growth rate will decline to 1.8 percent in our main scenario, or 1.5 percent in our "low" scenario. We anticipate a further decline by 2030. By then, growth potential in the main scenario will drop to 1.6 percent and in the "low" scenario to just over 1 percent. Only under the more optimistic assumptions about all production factors in the "high" scenario will Switzerland be able to maintain its growth potential at current levels.
Strong, sustainable growth in Switzerland requires a better utilization of potential. The increased mobilization of the domestic labor force requires changes to the legal and tax framework conditions. For instance, higher labor force participation can be achieved only if women are no longer discouraged from employment by misguided tax incentives. Indeed, they can be motivated to join the workforce if the pension system is adjusted and the way is paved for higher integration of older workers on the labor market by more flexible HR and salary policies. However, an increase in labor productivity depends largely on further expansion of competition on the domestic market and a broader international base. Reducing administrative interference and regulation is another primary challenge for the future. Last but not least, efforts to boost the venture capital market could promote investments in productivity. This, in turn, would not only trigger Switzerland's innovative potential, but also generate further growth impetus.