The Rise and Fall of Swiss Unemployment: Relative Demand Shocks, Wage Rigidities, and Temporary Immigrants

Abstract

Switzerland, traditionally a ‘zero unemployment’ economy, has seen an unprecedented risein joblessness in the 1990s although unemployment fell again to a rather low level after 1997.This paper tests whether Switzerland experienced a negative relative net demand shockagainst the low skilled (like the US) during this period. It turns out that only workers with aneducational level below apprenticeship were affected by such a shock. Furthermore, I testwhether wages reacted flexibly to this shock and find that they were rigid, which can explainthe relative unemployment increase for this group. Finally, I test whether the skill mix oftemporary immigrants was adjusted to the relative demand shock. The evidence suggeststhat it was changed during the period around 1997 when unemployment peaked. By 2001,however, the educational mix of temporary immigrants was not significantly different from its1991 level any more, although relative unemployment for the least skilled was still relativelyhigh in face of the relative wage rigidity affecting this group.

Keywords: non-employment, rigidity, identification, foreigners, earnings, work permits

JEL Classification: E24, J21, J31, J64