What helps against the shortage of skilled workers: Higher wages
All companies complain about too few staff. Why are wages still rising much less than inflation?
Above all, bureaucracy is growing: a nurse uses a flashlight to check the condition of the patients in the department of internal medicine at the University Hospital in Lausanne.
Photo: Gaetan Bally (Keystone)
The Swiss job market is booming. The number of registered unemployed fell to 92,755 in March, the unemployment rate to 2 percent – values that were last reached before the 2008 financial crisis.
According to the Economic Research Center (KOF), 2022 was one of the best years for the labor market in decades. No wonder, since almost all sectors and companies have been complaining about a lack of staff for a long time.
According to a study by the KOF, the shortage is particularly great in technical professions that require a federal certificate. It is difficult to find female heating installers, plumbers and carpenters, but also female doctors, nursing staff and software developers.
In a market economy, when something becomes scarce, its price goes up. But that’s where the problem lies. In 2021, the wage level has even fallen. Although wages rose by an average of 1.5 percent in nominal terms in 2022, they fell by 1.3 percent after deducting inflation. And according to KOF forecasts, real wages will fall again in 2024 due to high inflation.
At the same time, wages in the sectors that are particularly complaining about staff shortages have only risen at a below-average rate since 2011 – for example in construction, health care or gastronomy.
The labor market does not appear to be a fully functioning market. Employees have specific skills and are not easily interchangeable. Changing jobs is a strategic decision that is not taken lightly.
Profits grow faster than wages
Nevertheless, a long-lasting shortage of staff ultimately means that employers are unwilling or unable to pay what the labor market demands. For the unions, the case is clear. Daniel Lampart, chief economist at the Swiss Confederation of Trade Unions, notes that many companies would use inflation to raise their prices regardless of the costs.
Isabel Schnabel, a member of the Executive Board of the European Central Bank, confirms the finding for the euro zone and the USA: “Profit growth played an important role in the rise in inflation,” she said at a conference in Washington at the end of March. The contribution of earnings to inflation was greater than that of wage growth. There is no data on this in Switzerland. One indication could be that the listed companies are planning record dividend payouts for the 2022 financial year.
There are other reasons why wages only react incompletely to the scarcity. One important reason is the high level of immigration, another is state market intervention. “If there is a shortage of staff, wages would have to rise. In some areas they do that too, for example with software developers. But in other areas this does not happen, or only happens very slowly, because the price mechanism is hampered by interventions, such as collective labor agreements and state-mandated wages,” says Alexandra Janssen, head of asset management at the financial consulting firm Ecofin and lecturer at the University of Zurich.
With regard to health care, Mathias Binswanger, Professor of Economics at the University of Applied Sciences Northwestern Switzerland, has long pointed out the rigid wage systems in many hospitals and care institutions. Wage increases are mainly achievable through academic degrees. However, those who continue their education in this way usually switch to the nursing bureaucracy, which is growing rapidly. This increases healthcare costs without eliminating the lack of care.
Wage transparency between companies leads to higher wages
A little-noticed reason for the lack of adjustment of wages to the scarcity is a lack of transparency. The wage transparency regulations that have been enacted in many countries mostly aim to eliminate unequal pay for equal work. They narrowed the pay gap between men and women. But they also lowered average wages at the same time because men’s wages fell, research shows. This is because they unilaterally shift bargaining power to the employer. In the case of wage transparency, this rejects individual increases because otherwise he would have to grant them to everyone.
On the other hand, vertical wage transparency, i.e. information about the differences between hierarchical levels, has a positive effect on wages. This gives people a better idea of what they will earn if they are promoted. This promotes performance and thus leads to higher productivity and higher wages.
People systematically underestimate the wage jumps caused by job changes. Transparency about wages in other companies therefore leads to higher wages, as studies show. Workers learn where they can earn more, which strengthens their bargaining power. Low earners benefit the most from this. Such wage transparency also increases competition between employers, which puts upward pressure on wages across the market.
What about companies that cannot pay higher wages? They automate or outsource production abroad, which does not burden the labor market in times of staff shortages. Swiss companies have repeatedly done both successfully.
Staff shortages have been part of this for at least 35 years
However, the weakest companies cannot keep up. What is a drama for the individual company is a win for the economy as a whole. Rising wages force the weakest companies out of the market, freeing up staff for the most productive ones.
The weak wage increases could also be related to the fact that the Covid aid has kept numerous companies alive that are not viable in the long term – so-called zombie companies.
More competition can lead to “a double dividend”, as Clemens Fuest, head of the German Ifo Institute, emphasizes: workers are increasingly being deployed where they are more productive, and wages and working conditions are improving where they are from a market economy perspective were bad.
Switzerland has done this successfully. Because a shortage of staff has been part of it for at least 35 years: “Alarming shortage of skilled workers in Switzerland” reported the Swiss cable agency on August 24, 1987.
«Little Switzerland produces for the whole world. As long as the global economy is booming, we can always produce more and therefore always have a shortage of skilled workers,” says Alexandra Janssen. We would have to worry if nobody complained about a lack of staff anymore.
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