Monday, May 19, 2014

The Swiss proposed a minimum wage of $25 per hour...or is it $16? Depends on your definition of exchange rate

The Swiss held a nationwide vote to raise the minimum wage and it was soundly defeated.  In the US, the media reported that it would have been about $25.00 US Dollars had it passed.  Seems like a lot!  But is it REALLY that much?  It depends on what your definition of "exchange rate is".

For the Swiss the number they saw on their ballot was "22 Francs per hour".

The current official exchange rate(05/19/2104)  is $1.00 US will exchange for .89 Swiss Francs and 1.00 Swiss Franc will exchange for $1.12. The exchange rates are reciprocals of each other.

So, if we take 22 SF and multiply by $1.12 that equals $24.64.  Close enough for the mainstream media to round up to $25.00.

However, economists are hesitant to use current exchange rates because they are so volatile and can change for transient reasons on short notice. These fluctuations can distort the real economic picture within a domestic economy. They prefer to use an exchange rate based on "Purchasing Power Parity" (PPP).

PPP compares the actual price of a market basket of identical goods/services in Switzerland and the US. The idea is to establish a more realistic exchange rate that shows the purchasing power of one currency relative to other in terms of what it can buy in either country.

Purchasing Power Parity (PPP): $1.00 US will exchange for 1.37 Swiss Francs and 1 Swiss Franc will exchange for $.73 in 2013 according to official OECD data for 2013.

At this exchange rate, 22 Swiss Francs at $.73 equals $16.06. (Many media outlets are reporting it as about $14.00 PPP---I do not know how they arrive at that number)  I WELCOME ANY HELP ON MY MATH!!

So, at the market exchange rate the Swiss minimum wage would be $24.64 but at the PPP exchange rate it would be a $16.06.

That is still a very high minimum wage at $16.00 per hour, but I think it is important to put it in its proper purchasing power context.  Hope it helps...

REVISION:  There are 3 sets of PPP numbers available on the OECD website HERE.  You can see the categories on the LEFT side of page.  I used "PPP and Exchange Rates" to do the above calculation.  However, if you click on either of the other two links (PPP for Private Consumption or PPP for individual consumption) you will find HIGHER PPP numbers for Switzerland.   Using these numbers you get closer to $14.00 in US dollars.
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