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back to index backEUROtalk October,  2005


Employment Four Times Costlier in Western Europe Than in The East

"Employment costs considerably influence the choices of political, economic, and social decision makers, as they account for some two thirds of the production costs of goods and services.

Moreover, knowledge of employment cost levels is an essential tool in the strategic planning of investment production, employment policy, or wage levels in collective bargaining."

Eurostat ("EU labour costs 1999," Statistics in focus, population and social conditions, Theme 3, 3/2001)

Background

The enlargement of the European Union in May 2004 and the introduction of the euro as a common currency in a large part of Western Europe have significantly increased the momentum towards a more integrated European economy. These factors, in conjunction with growing economic globalisation and increasing international competitiveness, have led to an increased focus on employment costs across the member states.

Recently, we have seen several high-profile cases whereby European companies have moved production facilities either to Eastern Europe or to developing countries such as India and China. In addition, there has been pressure on Western European employees, notably in Germany, to work longer hours for the same pay. These cases have intensified the debate concerning the location and relocation of production facilities. This, in turn has highlighted the importance of the employment costs issue and its role in the investment decision-making process.

Since the introduction of the euro, it is easier to compare employment costs across Europe: the euro is the single currency for 12 of the 25 current member countries. Employers are therefore able to monitor employment cost differentials more easily and employees may increasingly be tempted to use this information as a factor in negotiations on pay and conditions.

Mercer Human Resource Consulting continually monitors trends in employment costs across Europe. This 2004 survey studies the levels and trends in employment costs across the European Union and compares them to those in the USA and Japan, as well as to those in two major developing countries (China and India).

The main results of this survey are set out in Chart 1. This shows National Average Earnings (NAE) and the additional employment costs associated with social security, mandatory, and/or voluntary benefits provided by the employer.

The main results of this survey are set out in Chart 1. This shows National Average Earnings (NAE) and the additional employment costs associated with social security, mandatory, and/or voluntary benefits provided by the employer.

Chart 1: Comparative employment costs in Europe (in euros)




Scope of the survey

Pay

The average pay for each country is taken as the National Average Earnings for full-time male employees. It is assumed that this figure includes pay for vacation and public holidays. In some countries there is either a statutory or customary practice to pay or accrue this pay as a separate item.


Social security

This includes all standard employers' costs for benefit programmes created by governments and financed through government bodies or agencies.

Mandatory benefits

This includes benefits that employers have to provide, by law or national collective agreements, either through their own or industry-wide financing mechanisms.

Voluntary benefits

This is an indication of the average cost of employee benefit plans that employers typically provide in the relevant country. It includes retirement, death, disability, and medical plans. The cost of other benefits is not included – such benefits are not typically provided for all employees, and their cost is relatively minor.

The figures are not adjusted for the differences in cost of living, productivity, or personal tax between countries. It should be noted that the make up of each country's economy has an effect on the calculation of National Average Earnings. In some countries, a substantial low-wage sector can often co-exist alongside other high-wage sectors. The national average figures may therefore not always be a meaningful benchmark when looking at a specific employer or industry sector.

Highlights

* Employment costs continue to vary widely across Europe, with employment costs in the accession states being noticeably lower than those of the existing members. The survey confirms the advantage that the Accession countries have in this field. Average employment costs in the other EU countries are over 4.5 times more expensive than those of the Accession countries.

* Highest overall employment costs are borne by Belgium, Sweden, and Germany, closely followed by Luxembourg and the UK.

* Costs vary considerably: in the most expensive country (Belgium), employment costs are more than 11 times higher than those of the cheapest country (Latvia), and nearly twice as high as the European average.

* The UK ranks fifth out of the 25 EU countries, and is 40% more expensive than the US. This represents a shift away from previous surveys and can, in part, be explained by the continuing weakness of the dollar against both the pound and the euro. This observation raises concerns about whether US companies will continue to invest in countries in the EU. It appears likely that if they do decide to invest in both plants and machinery within the EU, it will be in the new Accession countries which offer considerably lower employment costs, although logistics and infrastructure may remain a hurdle in some countries.

* Social security costs as a percentage of salary are on average approximately one-third higher in the Accession countries than in the other countries of the European Union.

* As the following "league tables" show, the costs of social security and mandatory benefits have a significant influence on total employment cost. In the case of Belgium, social security and mandatory benefit costs are sufficiently high that they push Belgium from rank five in terms of pay to rank one in terms of total costs. This applies similarly for Sweden.


Chart 2: European employment costs league tables

 National Average Pay Pay plus Employer's Cost for Mandatory BenefitsPay and Cost for all Benefits
1DenmarkSwedenBelgium
2LuxembourgBelgiumSweden
3GermanyGermanyGermany
4UKLuxembourgLuxembourg
5BelgiumDenmarkUK
6SwedenFranceDenmark
7FranceUKFrance
8IrelandIrelandIreland
9NetherlandsNetherlandsNetherlands
10ItalyItalyItaly
11AustriaAustriaSpain
12SpainSpainAustria
13FinlandFinlandFinland
14GreeceGreeceGreece
15PortugalSloveniaPortugal
16SloveniaPortugalSlovenia
17HungaryHungaryHungary
18Czech Rep.Czech Rep. Czech Rep.
19PolandPoland Poland
20EstoniaEstoniaEstonia
21SlovakiaSlovakiaSlovakia
22LithuaniaLithuaniaLithuania
23LatviaLatviaLatvia



* Benefit costs are high in many European countries, as shown in Chart 3. This compares benefit costs in each country as a percentage of National Average Earnings. Benefit costs within the EU can vary from less than 10% to almost 50% of pay and can, for voluntary benefits, vary significantly within a country.


Chart 3: Benefit costs as a percentage of pay







* Outside the EU, the differences are even more notable, with benefits in China equal to over 60% of pay.

* Chart 3 highlights a major challenge facing Europe over the next 20 to 40 years: the serious financing difficulties of "pay-as-you-go" systems and the possible resultant damage to the global competitiveness of European countries.

* Overall, the EU is approximately 15% dearer than the US. However, when only the original 15 EU member states are considered, the US is cheaper by approximately 23%.

Further analysis has been undertaken to investigate employment costs for a finance manager. The chart to the right shows a typical level of pay for a finance manager position and the additional employment costs associated with social security, mandatory, and/or voluntary benefits provided by the employer.

Chart 4: Comparative employment costs for a Finance Manager (in euros)


* Lowest costs in the European Union are borne by Latvia, Estonia, and Lithuania. Highest costs in the same region are borne by Germany, France, Austria, and Denmark, closely followed by Italy. Belgium, our most expensive country for NAE, is in seventh place.

* Once again, the Accession countries are significantly cheaper. The average employment cost for a finance manager is twice as expensive in the first 14 countries than in the Accession countries. The exception is Slovenia, where the costs are more in line with Western European norms.


Implications for employers

The cost of social security and mandatory programmes is largely outside employers' control. However, given that costs are already high and may increase further in some countries, employers need to be aware of the potential impact on future profitability.

A sustained, focused search for the most cost-effective delivery of pay and benefits is not a luxury. Many companies are considering the migration of their production to another country. In recent months, Mercer's International practice has been involved in corporate restructures where, in one instance, production was moved from Germany to Italy and in another, from Germany to Poland and Hungary.

The net cost of voluntary, employer-sponsored plans can be controlled more effectively. Employers need to ensure that they make full use of the mechanisms at their disposal to achieve this. This includes reviewing:

* The design of employee benefit plans to:

- - - ensure they will not automatically have to make good any future shortfall in social security or mandatory provision;

- - - deal more effectively with the impact on the business of the various accounting standards for reporting benefit liabilities.

* Benefit financing methods through various international tools like multinational pooling, the use of captive insurance, rationalising the number of plans and providers of actuarial, investment and custody services; and

* The risks to the business and the adequacy of the governance procedures and systems.

For Europe, the removal of obstacles to Pan-European pension funds will help enormously to further rationalise the cost of delivering benefits. Recent EU legislation has made progress towards the day when these can become a reality, but it does not go far enough. The refusal of EU countries to offer the same tax advantages to non-domestic plans remains a huge stumbling block.

Source: Mercer HR Consulting - GAI


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