Are employees in Switzerland losing out on the fruits of growth? The proponents for a higher taxation of capital, on which the Swiss will vote on September 26, think so. This is understandable because in Anglo-Saxon countries the share of production going to labor is decreasing. But such is not the case in Switzerland.
Who gets the income from growth?
The production of GDP relies on factors of production that are paid for their input. The data of SECO present GDP according to the income approach, i.e. wage compensation, depreciation (consumption of fixed capital), and compensation of capital including profits (net operating surplus).[1] The figure below shows how the composition of GDP has changed over the past 30 years.
Domestic production is largely labor-based, so wage compensation accounts for more than half of GDP (red line, right-hand scale). The rest of output is divided roughly equally between depreciation (green line) and operating surplus (blue line).
Until about 2007, each of the three lines fluctuates around a stable level, and the share of wages rises during recessions. This may seem surprising, because after all most of us don't get a raise when the economy is weak. It is actually a mirror image of the falling profit share. Fluctuations in economic activity are primarily reflected in the latter, as our salaries do not change from year to year and companies avoid (as much as possible) laying off employees only to have to rehire them after a few months.
Things change around 2007, with the emergence of an upward trend in the share of wage compensation. In 2020, it reached almost 59% of GDP, a level never seen before. This trend is reflected in the opposite direction in the operating surplus, which has fallen from 21.7% of GDP in 2007 to 16.1% currently. Even if we disregard the exceptional situation in 2020, the profit share has decreased by 1.8% between 1990-2007 and 2008-2019.
This evolution may be surprising, as we do not have the impression of strong wage increases since 2007. In fact, the increase in the wage share is simply a mirror image of the stagnation in profits. The figure below shows the evolution of wages, depreciation, and profits, but this time in terms of level, also including the evolution of nominal GDP. Since 2007 wage compensation has grown at a similar pace to previous years. However, GDP growth has slowed down, mainly due to lower price growth. This slowdown has been reflected in the operating surplus, which has stagnated. In other words, since 2007 Switzerland has been similar to a firm that has seen its selling prices come under pressure and has had to squeeze its profits in order to continue paying rising wages.
Where does this stagnation feeling come from?
The proposal on capital taxation reflects a feeling that living conditions are not progressing much. This is quite legitimate. The graph below shows the growth of real GDP per capita since 1980, which is a good indicator of living standards. Between 1980 and 2007 growth averaged 1.2-1.5% per year, with the contraction of the early 1990s offset by better growth over the rest of the decade. However, the pace has slowed significantly since then, with growth of only 0.7% between 2007 and 2019.[2]
This reflects the slowdown in productivity growth. While productivity growth regained momentum in 2017-2018, this has been short-lived.
Muted productivity growth leads to a stagnation in the population's standard of living, which explains the sense of stagnation. However, this is a completely different development from a deterioration of the condition of employees to the benefit of companies. It is in fact rather the opposite that has occurred since 2007.
Of course, this observation applies to the remuneration of labor as a whole. It remains quite possible that the distribution of the wage bill has evolved towards greater inequality, an aspect that will be the subject of another article. But even then, we are not in a situation where capital penalizes labor.