Wednesday, November 29, 2006

'Boxcar, Autobus, And Jet Plane Civilization' For The Young, Strong, And Ambitious As The Eastern Half Of Europe Emerges From Its Great Depression

"Eight former communist countries -- the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia -- joined the European Union on May 1, 2004. Although the new EU members have a combined population of 74 million, their economies have initially added less than 5% to the EU's Gross Domestic Product. However, the next five to ten years will undoubtedly produce a major transformation of these economies, as well as others including Russia (pop. 143 million), Ukraine (pop. 47 million), Turkey (pop. 71 million), Romania, Bulgaria, Belarus, Georgia, Armenia, and Moldova. A great deal, however, will depend upon the choices that are made by individual governments and investing enterprises.

Labour costs in the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia are well below those for the current EU states (EU15). In February 2004, basic median hourly pay plus social security costs (basic labour costs) stood at 17.77 euros across the EU15 countries. This compares with a weighted average of just 3.31 euros per hour in the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia.

Countries Hourly labour costs in euros [2] Unit labour va/hr in euros [3] Labour costs as % of labour productivity [4]

Old EU15 17.77 28.83 61.6%
New EU8 3.31 7.95 41.6%
Germany 21.31 36.1 59%
Austria 17.65 32.4 54.5%

Ukraine *** *** ***

Note that Social security includes total statutory employers' contributions to old age, disability, survivors, sickness, maternity, work injury, unemployment and family allowances as a percentage of payroll. Figures exclude the first week of employers' direct obligations (where appropriate) to pay sickness and maternity benefit. If employer pays these benefits after the first week, the payroll burden is estimated. Where statutory employers' liability insurance is required, the assumed premium is 5% of payroll.

It can be seen from the above table that basic hourly costs represent 61.6% of the labour productivity achieved in the EU15 states, but only 41.6% of the labour productivity in the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia. This is to be expected in rapidly developing market economies because a substantial amount of labour productivity is needed as capital for reinvestment by companies in new buildings, plant and equipment. However, as the economies of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia grow, employees will demand an increasing amount of the generated wealth in the form of pay and welfare benefits. The opportunities presented for the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia will primarily depend on how they manage this cost/productivity gap as they move towards the general pattern of practice for the EU15 countries.

The established members of the EU15 club

The Benelux countries provide a well-ordered and generally stable environment for enterprises. Belgium's employment laws are still based on a needless division between blue and white-collar workers, and there are complex thresholds determining the operation of certain legal rights. The Dutch welfare system has tended to encourage absenteeism, but it is currently being modified to improve the incentive to work. The best example provided by the Netherlands for accession states is in its highly diverse cultural mix and tolerant attitudes towards minority ethnic groups, which are reinforced in the workplace by highly effective equal opportunity laws.

Denmark has driven up its wage levels to be the highest in the world by heavily taxing employees and relying heavily on collective bargaining to regulate pay and employment conditions. Although productivity levels are high and the social security burden on employers is very low by European standards, the system has grown out of particular historical origins and does not present a model that could be readily followed by any of the accession states.

The French government has long operated in awe of its numerically small, but highly militant trade unions. The official stance towards foreign-owned multinational enterprises has often been hostile and there has been a tendency to overreact to corporate restructuring by the application of penal sanctions. The 35-hour week has not been a success and the French government is now trying to unpick itself from many of its past policies.

Germany is the biggest and by far the most successful of the EU15 states. During the last fifteen years it has achieved a difficult transition in its eastern states from a system of state-run monopolies to a modern market economy. Complete integration has not, however, been fully achieved and a 20% to 30% wage gap still exists between eastern and western states. Neither has Germany been able to significantly narrow the equal pay gap between male and female employees. This is most evident in the state of Bremen where, in 2003, despite having a longer working week than men, women in production industries received only 74% of the gross earnings of their male colleagues.

Ireland provides the best example within the EU of a small country overcoming its lack of natural resources and peripheral geographical position to become a true 'tiger economy'. This has largely been achieved through a sustained strategy by the Irish Development Agency to attract manufacturing operations and then build on that achievement to generate higher value-added activities such as research and development. Ireland has not focused on being a low-wage location, but has concentrated on minimising bureaucratic burdens and keeping overheads such as social security costs to a minimum.

Italy has overcome many of its past economic and political instability problems, and its most recent Legge Biagi reforms have helped to encourage flexibility and open up the labour market. However, it has still not overcome its major north-south economic divide, reduced the bureaucratic burdens that it continues to place on employers, or resolved the inconsistent application of its complex employment laws.

The UK operates a very different corporate and work culture from the European continent. It has virtually abandoned sectoral collective bargaining and has been reluctant to embrace formalised systems of employee participation. It has tended to take a minimalist approach to all EU social and employment Directives and has refused to join the eurozone. Although this has helped to encourage the growth of new enterprises, much of the UK's advantage in attracting inward investment has been gained through its cultural and linguistic links with the USA. Labour costs, however, remain high by EU standards and productivity is well below the level that this degree of economic freedom should have achieved.

Both Germany and Austria have kept basic labour costs as a proportion of labour productivity below the weighted EU15 average - not because they have contained labour costs, but largely because each has generated such a high level of labour productivity....


The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia must be careful not to let labour costs rise too fast and take up the resources available for infrastructure investments. The best examples for the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia to follow are Ireland for its long-term economic development strategy, the Netherlands for its ethnic integration policies, Finland and Austria for their practical, but highly participative approaches to labour relations and, above all, Germany for its culture of 'organised affluence'.

Germany is alone amongst the EU15 member states in achieving a high level of labour productivity, wage stability and the capacity to modify its employment policies in a relatively painless way. Where it falls down is in the continued wage divide between the eastern and western Lander and its inability to gain the most from its female human resources - as reflected in the significant gender pay gap."

Source (slightly edited): The Federation of European Employers, London, UK, 2005

With thanks to On An Overgrown Path for the trail-marking.



Presentation by Yuriy Fedun, Ivan Franko National University of Lviv (Ukraine); Visiting Scholar at the Institute for European, Russian, and Eurasian Studies. Program sponsored by the Institute for European, Russian and Eurasian Studies.

Thursday, November 30
12:30 - 2:00 p.m.

Voesar Conference Room
George Washington University
1957 E Street, NW
Suite 412
Washington, DC

RSVP at or 202.994.6340

A still fragmented and divided Europe 15 years after the end of the 40-Year Cold War -- mankind's greatest night terror, to date.

Graphic credit: European Immigration Lawyers Network. With thanks.


Bon voyage, Yuriy K.


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