Labor Market Institutions and Wage Compression: An Institutional Labor Economics Perspective on Software Developer Salaries Worldwide

The theory of marginal productivity has long formed the basis for labour economics and has been widely used to understand the relationship between output and wages. However, labour market institutions (such as tax systems, bargaining structures, employment protections and cultural norms) also influence wages.

This is exemplified by the diversity in the software developer salaries worldwide, which shows how institutional differences influence wage dispersion in high-skilled occupations across advanced economies.

Recent compensation studies have shown that the average software developer in the United Kingdom earns approximately $63,000, whilst the average software developer in the United States earns about $137,000 and the average software developer in Switzerland earns roughly $119,000 (these figures vary based on the source and currency exchange rate). In all three countries, the technology sector is well developed, and the skills required for the job are comparable; however, the wages paid to the software developers employed in the three countries are significantly different.

Institutional Labor Economics and Wage Compression

Wage structures reflect both productivity and institutional factors such as collective bargaining systems, labour law frameworks, tax systems, and social insurance arrangements, as emphasised in institutional labour economics. One of the central concepts in this literature is wage compression—the extent to which institutional mechanisms reduce wage differentials between workers or firms.

The United Kingdom exhibits a greater degree of wage compression than the United States. Although union density has declined in the UK, broader wage-benchmarking norms and pay-band structures remain. The UK tax and social welfare system also reduces after-tax wage dispersion. Furthermore, employment law and labour-market regulation create frictions in wage competition that limit rapid wage bidding between firms.

In contrast, the US labour market is highly decentralised and flexible. Wage setting occurs primarily at the firm level with limited collective bargaining. Competition between firms for employees is strongest among highly skilled workers, particularly in high-productivity sectors such as technology. This flexibility creates greater differentiation between firms, as those generating very high revenue per employee can pay substantially higher wages. As a result, wage inequality is greater. The United States consistently has a higher Gini coefficient than the United Kingdom, indicating greater income dispersion.

Productivity, Flexibility, and Firm-Level Dispersion

Different institutional structures shape how firm-level productivity translates into employee wages. For example, US technology companies such as Microsoft and Google exhibit very high productivity per employee due to scale and capital intensity. In a flexible labour market, employees capture part of these productivity gains through high compensation packages, including stock-based pay and investment returns.

By contrast, although several major technology companies are based in the UK, the technology sector is relatively small compared with the overall economy. Less venture capital is invested, and large platforms are less dominant; consequently, there are fewer UK-based firms with the extreme productivity levels observed in the United States. This results in less upward pressure on wages.

Switzerland has a different institutional structure, characterised by very high productivity, a strong national currency, and concentration in high-margin industries such as finance, pharmaceuticals, and specialised manufacturing. Labour markets in Switzerland are flexible but operate within a high-cost, high-income economy. When wages denominated in Swiss francs are compared with US-dollar wages, the strength of the Swiss franc produces higher nominal wage levels. Although wage dispersion exists in Switzerland, the concentration of employment in high-value industries raises the overall wage distribution.

Economic Forces Driving Divergence

The following structural forces shape these outcomes:

1. Taxes affect net pay and labour costs.
2. Collective bargaining coverage significantly affects wage standardisation.
3. Labour mobility and immigration policy determine workers’ outside options.
4. Variation in productivity across firms determines the surplus that can be shared with workers.
5. Currency strength and cost-of-living differences shape comparisons of nominal wages.

The way institutions mediate these forces varies across labour-market systems. In relatively flexible systems, where firm-level productivity differences are large, productivity translates quickly into wage differentials. In more compressed systems, institutional mechanisms reduce wage dispersion despite underlying productivity variation.

Ramifications

Skill premia vary across countries. In the United States, wage dispersion is greater; therefore, high-skilled workers (i.e., those whose skills are highly valued) receive higher compensation than low-skilled workers. While this may attract highly skilled workers to the United States, it may also increase income inequality and social tension, particularly in more equal societies such as the UK.

The Swiss experience suggests that it is possible to combine a high-wage environment with institutional stability, but this requires high skill and productivity across industries.

The key policy implication of this comparison is that wages are determined within institutional frameworks and depend on worker skills. The same skills generate different wage outcomes depending on labour-market structure.

Conclusion

Salaries for software developers around the world do not merely reflect differences in productivity or skill among developers; rather, they are shaped by institutional labour economics. Because many factors influence how productivity translates into wages (including wage compression, bargaining norms, tax systems, and labour-market flexibility), it is necessary to analyse these institutional features to explain wage differences among similar workers in advanced economies.