One of the wisest British thinkers of
the 19th century, Thomas Carlyle, wrote
that the progress of human society consists
in the“better and better apportioning
of wages to work.” Many generations
later, Europe has still not progressed very
far in that direction.
The amounts people are paid are
among the fundamental dynamics of any
society and should be very easy to justify.
In a market economy, revenues from the
sale of a successful company’s products
and services, minus material and other
external costs, generate an operating surplus.
After allowances for profit and
charges such as social security and pension
contributions, the remaining funds
may be allocated to individual wages and
salaries. In a well-run enterprise, some
funds will be set aside for performance
bonuses and the rest distributed on the
basis of know-how, responsibility, competence
and hours worked.
The problem is that this approach is
seldom, if ever, adopted. European pay
levels are more likely to be determined
by reference to commercial pay surveys
and through collective bargaining. In
some countries, minimum wage rates
exert a major influence, in others they
are too low to be relevant - statutory
minimum rates range from around ten
percent of median pay in Russia to 57
percent in France - and some countries
do not have them at all. In Scandinavia,
Germany, Italy and Austria, the only formal
constraints on the bottom of the pay
market are those set through collective
agreements.
Although its importance is diminishing,
collective bargaining is still the
main determinant of blue-collar and
junior white-collar pay throughout
much of Western Europe. The exception
is the UK, largely because sectoral bargaining
broke down in the 1980s under
Prime Minister Margaret Thatcher, following
a period of industrial unrest in
the late 1970s.
In much of Central and Eastern Europe,
on the other hand, the collapse of
state-dominated trade unions since the
fall of communism in 1989 has left both
sectoral and company collective bargaining
in a state of flux. In many new EU
member states in Central and Eastern
Europe, pay is set by local employers
working loosely together to hold wages
down. This process, however, is being
progressively undermined by inward-investing
enterprises. The new foreign investors
are making such huge savings in
labor costs that they can afford to cream
off the best workers by ignoring local
wage cartels and paying more.
The Federation of European Employers
(FedEE) has been monitoring
pay trends in more than 40 European
countries for the past six years. During
that time there has been a significant
narrowing in the overall pay gap between
the poorest countries (Belarus,
Bulgaria, Moldova, Romania, Russia,
Ukraine and many of the new EU member
states) and the richest countries
(Denmark, Germany, Norway and
Switzerland).
The trend is clearly confirmed in the
Federation’s latest report, Pay in Europe
2005, published in March 2005. In 2001,
for example, pay in Denmark was 39
times higher than in Romania, while
today the gap has narrowed to just 22
times. The report tracks median pre-tax
hourly wages for 31 job positions, in
three different sizes of companies, in 48
countries. The figures reflect the position
on February 1, 2005.
There are four main reasons for the
narrowing of the European pay market:
- The EU countries are developing a
more coherent labor market as people
increasingly move to work in other
countries and it becomes easier to live in
one country and work in another
- Western European countries are
struggling to restrain their labor costs in
the face of competition from Central
and Eastern Europe, China, India and
other Asian rivals.
- Poorer countries are reaping the
benefits of inward investment, and gov-
European Perspectives ernments in countries such as Belarus and Moldova are raising salary levels to stave off social unrest.
|
Median Employee Earnings League
Table: February 2005 |
|
Position |
Country |
Earnings Relativity |
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48 |
Denmark
Switzerlan
Norway
Liechtenstein
Isle of Man
Luxembourg
Guernsey
Germany
Sweden
Netherlands
Italy
Jersey
United Kingdom
Faroe Islands
Belgium
Finland
Austria
Ireland
France
Iceland
Spain
Gibraltar
San Marino
Cyprus
Andorra
Greece
Slovenia
Malta
Portugal
Croatia
Hungary
Czech Republic
Poland
Turkey
Slovak Republic
Estonia
Bosnia Herzegovina
Lithuania
Macedonia
Latvia
Romania
Russia
Bulgaria
Belarus
Serbia
Albania
Ukraine
Moldova |
100
83
77
74
70
69
68
67
59
58
56
56
56
56
53
53
53
51
48
46
39
36
34
30
29
25
22
20
19
14
13
13
11
11
11
9
7
6
6
5
5
4
3
3
3
2
2
2 |
©Copyright:FedEE Services Ltd 2005 All world rights reserved
Median pre-tax hourly wages for 31 job positions in three different sizes of
companies. |
- The decline of labor union power
and collective bargaining is allowing an
employer’s ability to pay to play a more
central role in wage determination.
As the table shows, a huge divide remains
between established EU countries,
such as Germany, Italy and the UK, and
countries in Central and Eastern Europe,
such as Poland and Hungary. In the most
extreme case, the richest country, Denmark,
pays 61 times the median rate in
the poorest country, Moldova (The exceptionally high Danish wage levels reflect the unusually strong grip of sectoral collective bagaining
agreements in Denmark, and the fact that employees pay more in taxes and social security than in any
other EU country, while employers make only token social security contributions, giving them more
scope to pay high wages.). For the
majority of European employees, however,
living standards are gradually being
harmonized and rewards for skills are
increasingly coming to reflect market
values.
Nevertheless the East-West gap has
not yet narrowed enough to remove the
huge incentive for industrial enterprises,
particularly in France, Germany, the
Netherlands, Scandinavia and the UK, to
shift their operations to Central and
Eastern Europe. Although there may be
concerns about political instability, lack
of security and corruption in some of
the least-developed states, there are few
barriers to establishing a business in
countries like Poland, where median
hourly pay is just 17 percent of the level
in Germany.
It is curious, therefore, that only a
few major Western European employers,
such as IKEA, Electrolux and Peugeot
Citroen, have so far taken advantage of
the opportunity to cut costs by shifting
production or central supply chain distribution
points to Central and Eastern
Europe.
Although U.S. companies are waking
up to the potential of Central and Eastern
Europe, they are still concentrating
investment in high-cost centers such as
Germany. A recent survey by the American
Chamber of Commerce and Boston
Consulting Group found that 26 percent
of U.S. companies based in Germany
considered Central and Eastern Europe
the most important region for corporate
investment. But 40 percent still planned
to increase their investments in Germany
in 2005, and nearly a third had spent
more than 40 percent of their entire European
investments in Germany over the
previous 12 months.
The“apportioning of wages to work”
in Europe remains far removed from the
simple distributive model outlined
above. At best, an annual salary budgeting
approach is used, so that any increase
in the amount allocated to wages is
broadly in line with projected company
performance.
When employers bring these data to
bear on industry-wide collective bargaining,
it also means that pay rates will
not move slavishly in line with retail
price inflation. There is nothing in this
process, however, to prevent the perpetuation
of excessive wage costs, and European
companies could soon find
themselves ill-equipped to confront international
competition.
Collective bargaining made sense
when its objective was to keep competitors
out of a job market, or force them to
pay comparable rates. Now, however, in
the globalized business environment of
the 21st century, sectoral wage and salary
scales no longer have any value or meaning
for private sector enterprises. If the
European economy is to survive the onslaught
from Indian and Chinese production
centers during the next ten
years, companies must act swiftly and
take what advantages they can from improved
pay determination methods and
what remains of the East-West pay divide
in Europe.
Robin E. J. Chater is Secretary General of the
London-based Federation of European Employers
(FedEE).
The opinions expressed in this article are entirely
those of the author and do not necessarily represent
the views of FedEE or its corporate members.
Federation of European Employers
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