Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

Narrowing The Wages Gap In Europe

Martin Myant 28th February 2017

Martin Myant

Martin Myant

There are huge disparities in wage levels across the EU. As Figure 1 shows, the level in Romania in 2015 was about half that of Czechia, which was in turn less than one third the German level, with the gap actually increasing since 2008. Some differences in pay reflect different kinds of work, but gaps remain enormous even where work tasks are very similar. This applies across many familiar jobs, such as teachers, bus drivers, bar staff or car-assembly workers, for many of which workers can easily move between countries. It is not credible to suggest that German bus drivers take six times as many passengers, or German teachers handle six times as many students as their Romanian colleagues.

Figure 1: Labour cost levels in Germany, Czechia and Romania (euros per hour, 2000-15)

myant graph01

Source: Derived from Eurostat, tps00173

The European Commission and others have argued that such low pay levels are essential for maintaining international competitiveness, a term given apparent numerical precision in the measure of ‘unit labour costs’ (ULC), the labour cost of producing one unit of national income. They warn that even a small increase in wages without a matching increase in productivity will lead to lower exports, GDP and employment.

But changes in ULC are a poor measure of export competitiveness. They are derived from productivity measured across the whole economy, even though much of activity – including most obviously public services – does not enter into international trade. It would therefore seem better to use export prices or labour costs in exporting sectors. Even these, like ULC, prove to be a poor measure of competitiveness for traded goods in economies heavily dependent on outsourcing and inward investment by multi-national companies and with wages so far below the western European level. However, the European Commission sticks with ULC and that is the measure we are considering here.


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

The root of the problem lies in the way productivity is measured and compared between countries. In public services, such as education and health, the measure of output is derived from input costs, meaning to a great extent pay levels. Productivity therefore appears low simply because wages are low, without any reference to the content of the work. The outcome can be similar even in manufacturing industries. Firms outsource because wages are lower for making the same products. That is then reflected in lower prices and hence in lower measured productivity. Thus workers producing a car component outsourced to Czechia appear to be less productive than their German colleagues because the product is being sold at a lower price than when it was made in Germany.

Škoda in Czechia, part of the Volkswagen group, pays its employees around a third the German level. The difference does not reflect lower productivity in terms of cars produced. It is reflected in somewhat higher profits in the Czech plants, in a choice to locate production of cheaper models in those plants and probably also in the low transfer prices of components (notably engines and gearboxes) made in Czechia for other parts of the Volkswagen group. If pay were higher for workers producing Volkswagen engines in the Škoda plant, prices would be higher and the productivity of Czech workers would be measured as closer to that of German workers making the same product.

Figure 2: Unit Labour Costs and real export growth in Czechia between 1994 and 2015 (the year 2000 is 100 for all indicators)

myant graph02

Source: Calculated from European Commission data

Past experience shows that rising ULC do not prevent rising exports. Figure 2 shows this for Czechia. Until 2008, ULC were moving steadily upwards due to a rising exchange rate and wage increases in both the public and private sectors. These were then stopped in the post-crisis period. Exports faltered during the economic crisis and then resumed much the same growth as before. It was evidently just as worthwhile for multinational companies to increase production in Czechia whether wages increased or not when they remained so much lower than in western Europe.

There is scope for wages in central and eastern European countries to draw closer to western European levels. This could be achieved by resuming currency revaluation for those countries outside of the Eurozone, by negotiating higher wages through collective bargaining and by increasing minimum wages. Much higher wages might eventually lead multinational companies to relocate elsewhere, but that would currently be difficult, costly and pointless. Labour accounts for only about 6% of Škoda’s total costs while the costs of moving would be enormous. Meanwhile, higher wages would help stem the outflow of skilled and qualified workforces necessary for those activities – research, development and innovation – that support the higher pay levels in western Europe. Higher pay would thereby make possible inward investment and domestic economic activity with a higher technological level.

This post originally appeared on the European Policy and Politics (LSE) blog.

Martin Myant 1
Martin Myant

Martin Myant is an associate researcher at the European Trade Union Institute.


Support Progressive Ideas: Become a Social Europe Member!


Support independent publishing and progressive ideas by becoming a Social Europe member for less than 5 Euro per month. You can help us create more high-quality articles, podcasts and videos that challenge conventional thinking and foster a more informed and democratic society. Join us in our mission - your support makes all the difference!

Become a Social Europe Member

You are here: Home / Economy / Narrowing The Wages Gap In Europe

Most Popular Posts

Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto

Most Recent Posts

European Health Data Space,EHDS,Big Tech Fostering public research or boosting Big Tech?Philip Freeman and Jan Willem Goudriaan
migrant workers,non-EU Non-EU migrant workers—the ties that bindLilana Keith
ECB,European Central Bank,deposit facility How the ECB’s ‘deposit facility’ subsidises banksDavid Hollanders
migrant,Europe,workers All work and low pay—Europe’s migrant workforceAnkita Anand
art,European,prize The case for a European prize for artNed Hercock

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

ETUI advertisement

The four transitions and the missing one

Europe is at a crossroads, painfully navigating four transitions (green, digital, economic and geopolitical) at once but missing the transformative and ambitious social transition it needs. In other words, if the EU is to withstand the storm, we do not have the luxury of abstaining from reflecting on its social foundations, of which intermittent democratic discontent is only one expression. It is against this background that the ETUI/ETUC publishes its annual flagship publication Benchmarking Working Europe 2023, with the support of more than 70 graphs and a special contribution from two guest editors, Professors Kalypso Nikolaidïs and Albena Azmanova.


DOWNLOAD HERE

Eurofound advertisement

Eurofound Talks: housing

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s senior research manager, Hans Dubois, about the issues that feed into housing insecurity in Europe and the actions that need to be taken to address them. Together, they analyse findings from Eurofound’s recent Unaffordable and inadequate housing in Europe report, which presents data from Eurofound’s Living, working and COVID-19 e-survey, European Union Statistics on Income and Living Conditions and input from the Network of Eurofound Correspondents on various indicators of housing security and living conditions.


LISTEN HERE

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube