Cost and productivity measurement tools are

very accurate and provide companies with

useful indicators to benchmark European

countries. However, economic experts and

HR professionals agree on the importance of

qualitative factors that go well beyond the

figures.

COST AND PRODUCTIVITY

E U R O P E A T W O R K

An ADP publication

filip abraham

Professor filip abraham, Professor of international economics and european integration, Vice-rector at the catholic

university of Leuven (Belgium)

"Labour costs alone are not motive enough to set up

business in a country" Page 6

albert Martens

albert Martens, Director, in charge of Hr

global transformation at iKea.

iKea: productive by being human

Page 4

gilbert cette

gilbert cette, associate Professor of economics at the university of the Mediterranean and Member of the french economic analysis council

"Productivity is a prism for observing qualitative

performance factors"Page 2

A VISION ON

facts and figures

p. 8-9

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What are the main factors governing a country’s productivity level?The main factors are structural. They relate to the way the country works and its ability to mobilise the most efficient organisations and technologies. First come training and education policies, which govern qualification levels. Another important parameter is flexibility on the goods and labour markets. Barriers that limit access to certain economic activities and factors that impede recruitment and professional mobility are detrimental to productivity. Lastly, innovation efforts play a key role, as is the case today with information and communication technologies (ICTs). All these factors are, of course, correlated. Training contributes to innovation. But what is the point of innovating in ICTs if the market is not open, as was the case with telecommunications in several countries for a long time?

Which countries are europe’s best of breed in this respect?Ireland quickly moved up to the top three. Tax incentives for

multinationals certainly helped to improve productivity, and GDP was artificially boosted by large companies’ declaring their profits in the country. But that in no way detracts from the structural factors behind Ireland’s performance. It has maximised productivity by

investing in training, relaxing regulations and promoting ICTs. It’s by capitalising on these key factors that Ireland has forged ahead of other countries such as Greece and Portugal, which fall

short of the European average productivity although they are Eurozone member states.

Why don’t you hold Luxembourg or Norway up as models?It’s true, these two countries have the highest productivity levels in continental Europe.

But they are both small countries specialising in high value-added production. By concentrating on highly capital-intensive industries - finance in Luxembourg and forestry, oil

Gilbert Cette "Productivity is a prism for observing qualitative performance factors"Looking beyond the figures, co-author of "The Levers of French Growth" Gilbert Cette reviews the factors influencing a country’s productivity and what they tell us about its economic and social context. In his critical assessment of the calculation methods used, he also does away with a few preconceived ideas.

cOst aND PrODuctiVitY

““Companies must make strategic decisions in accordance with their activities and markets

Gilbert Cette, Associate Professor of Economics at the University of the Mediterranean and Member of the French Economic Analysis Council

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and fisheries in Norway, they have reached record-breaking productivity levels. This highly specific approach is difficult to export to larger countries with bigger populations and, hence, more diversified economic activities.

Why is france’s productivity higher than that of the united Kingdom, where flexibility is theoretically higher?One thing needs to be made clear as regards the method used for calculating productivity: it only takes into account the performance of employed people. That explains France’s good figures: with an employment rate ten percentage points lower than that of the UK, France’s jobs are concentrated on the most productive people. Furthermore, with shorter working hours, drops in productivity due to the effects of fatigue are avoided.

a somewhat disconcerting paradox...Companies are familiar with these data, which illustrate the influence of economic policies on productivity. A country with a high employment rate mobilises more of its available workforce, hence more less qualified people. Productivity suffers as a result, and it is more difficult for employers to recruit. What’s more, longer working hours lead to fatigue and reduce productivity. Thus, if you increase working hours by 1%, you only obtain 0.7% additional output. So productivity decreases by 0.3%. But you still increase the wealth produced by 0.7%, which boosts growth and GDP per capita: that’s the choice the UK has made.

Will the new eu member states catch up with the others?The change can come quickly, as it did in Ireland. So all is

not lost for countries with low productivity if they make the necessary efforts. By concentrating on the right factors, the Czech Republic, Hungary and Slovenia have already overtaken Portugal. Poland, Slovakia and the Baltic states are right behind. If productivity is improving more slowly in Romania and Bulgaria, it’s because they are restrained by inflexible institutions.

What importance must companies place on productivity before setting up in a new country?Productivity cannot be separated from labour costs. What is the point of doubling productivity if the costs triple? But cost is not the only factor. You also have to consider institutional factors such as industrial property protection, corruption, etc. Qualifications and the quality of training must also be taken into account, as must a country’s infrastructure. These are the factors that lie behind productivity, as though it were a prism through which we observe various qualitative aspects of performance. But a company must also make strategic decisions in accordance with its field of activity and markets.

gilbert cette is a member of the french economic analysis council (a body reporting to the french Prime Minister) and associate professor of economics at the university of the Mediterranean. a specialist in macroeconomics, growth, productivity analysis, production economics and labour economics, he sits on the editorial committee of several publications, including the review of income and Wealth (uK) and the international Productivity Monitor (canada).

His works include numerous books and articles:

“the Levers of french growth” (2007 – in french), a report by the french economic analysis council, co-author

“growth and Productivity in europe and the united states” (2007 – in french), La Découverte, collection "repères"

“trends in ‘structural’ Productivity Levels in the Major industrialized countries” (2007) economics Letters #95, pp. 151-156, co-author

“Opportunity costs of Having a child, financial constraints and fertility” (2007), applied economics Letters, Vol. 14, issue 4-6, May, pp. 239-244, co-author

>>

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Ikea’s performance lies in the success enjoyed by deploying the same offering and management model across all the

continents, undergirded by the universal values of the brand, which apply both to its millions of customers in 40 countries and its 125,000 employees. This ideal of well-being both at home and in the workplace rules out neither monitoring nor optimising measures. From cost prices to checkout queuing times, from productivity to sales per employee without forgetting cost per hour or staff costs, nothing escapes the company managers. But they keep an even closer eye on the quality aspects of these quantifiable performance indicators.

“A checkout employee can make all the difference between a customer returning or not,” reckons Albert Martens, director in charge of Ikea’s HR global transformation project. Natural radiance rather than just a smile, that is the impression to be left by the brand at that ultimate moment when the unfathomable factor influencing customer loyalty is so often put into play. That is how success is built in a dimension that is both tactical and strategic, with costed measures for short-term action on the one hand and a long-term commitment to investments in quality on the other hand. “We never lose sight of our long-term development objectives. Our HR policy is considered strategic and we are banking on our employees in the long run. We call them co-workers, in the primary sense of working together.”

fostering productivitySo Ikea will be taking a close look at its staff’s working conditions. Confident that its values are universal, it applies them in-house with as much assurance as it does on the market. An accurate impression of the workplace environment can be gained by simply taking a stroll through an Ikea store: an open organisation; direct, informal relations; virtually non-existent bureaucracy. Co-worker satisfaction and loyalty must be upheld in this area as well as all the others. In a company where well-being is an integral part of its culture; nobody is afraid of measuring this factor.

Every two years, co-workers are interviewed individually to rate Ikea as an employer. Career advancement, corporate responsibility, management, everything is evaluated. The results are consolidated at individual team level. A clear message is revealed when these results are compared with business performance: “Customer satisfaction is commensurate with co-worker satisfaction.” Hence a major ambition for HR: a student employed part-time who stays only for a year is already seen as a failure for the management. Fortunately, co-workers are allowed to make mistakes, as they are seen as opportunities for improvements... “Everything is based on respect for people,” stresses Albert Martens. “Everyone must be able to advance. So we ask our managers

Albert Martens

IKEA: productiveby being human Costs and productivity are closely measured at Ikea - nobody could ever doubt that! But the Swedish home furnishings giant, which is not listed on the stock exchange, is making long-term investments in managerial quality, to the point of standing back from current productivity models. This quality is reflected in the universal well-being values that the brand represents to both its employees and customers.

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Albert Martens

IKEA: productiveby being human Costs and productivity are closely measured at Ikea - nobody could ever doubt that! But the Swedish home furnishings giant, which is not listed on the stock exchange, is making long-term investments in managerial quality, to the point of standing back from current productivity models. This quality is reflected in the universal well-being values that the brand represents to both its employees and customers.

to be leaders first and foremost. All our processes are transparent, from the definition of objectives to assessment methods and reward criteria.”

in time and spaceSome people will say that there is nothing new about Ikea and that many companies – especially in the service sector – have understood the productivity gains that can be made with an intelligent HR policy. But the Ikea model goes much further and is

deployed within the mosaic of the different cultural environments and regulations of each country in which the firm operates – from Russia to Malaysia, Sweden to Japan and Saudi Arabia to China. This also requires a certain amount of patience.

Ikea is conquering the global market on an obvious fact - people feel happiest at home. And the company is so confident of the values represented by its brand that it carries them over to its management, striving for

universality. “Our vocation is to improve people’s lives, so we start with those of our co-workers,” sums up the manager. Inside, like outside: Ikea will adopt the same approach, the same personnel management procedures and the same employee services across the board. This is one objective of the current global HR transformation. Payroll, for instance, will be centralised and standardised, while each country will have a shared services centre guaranteeing the same quality of response for all. “People need to be respected, recognised and treated fairly all over the world,” adds Albert Martens.

Last and not least, Ikea knows how to take its time. Time to win over new markets, such as China or Russia, time to watch its co-workers develop and boost customer loyalty. PRACTICES

Ikea

IKEA is specialized in functional home furnishing products. Since its creation in 1943 in Sweden, the IKEA Group has grown into a major retail experience. With more than 231 stores in 24 countries and over 125,000 co-workers in 40 countries, the IKEA Group has annual sales worth more than 19 billion euros. Today’s IKEA range consits of about 9,500 articles. The IKEA Group is a privately held company.

The Swedish giant doesn’t cut corners, and continues to invest even when times are hard. For Ikea, the quest for productivity is based on an exemplary integration of short and long term goals, quantitative and qualitative aspects, development of business and people. It has to be said that the company is not under pressure from the stock market to deliver growth, and the HR managers feel quite at home with that.

Albert Martens, Director, in charge of HR Global Transformation at IKEA

“ “Our vocation is to improve people’s lives, so we start with those of our co-workers

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What are the main things you see when you look at european hourly labour costs?Hourly labour costs are much lower in the countries that have joined the European Union since 2004 than in the 15 states that were already members, to which we can add Switzerland and Norway. So there is still a gulf between the accession states and

the “historic” member states of the EU, although there are variations. Hourly labour costs have already reached 50% to 60% of the EU-15 average in the Czech Republic, Slovenia and Hungary. This figure is around 30% in most of the other new member states; it is even lower in Bulgaria and Romania.

can we predict future changes in this difference between old and new eu member states?There’s no doubt that the new ones are catching up, at quite a fast pace. This is demonstrated by the level already reached in some countries. It is reasonable to assume that the new EU member states will have halved the difference with the EU-15

states in ten years’ time thanks to their rapid economic growth. Investment from western companies is generating high demand for labour in the new member states, pushing wages, hence labor costs, upwards.

Filip Abraham "Labour costs alone are not motive enough to set up business in a country"In underlining the difference between hourly costs and unit labour costs, Professor Filip Abraham, a European integration and international economics expert, deciphers the different factors that make a country competitive and attractive.

are hourly labour costs a good indicator of how attractive a country is for a multinational company?Not on their own. The factor that companies must consider is the unit labour cost, which is the expenditure required to produce the same output value in each country. So it takes into account productivity. Sure, you can take

a short cut and say that costs are lower in the new member states and that the EU-15 states are more productive. But it’s the unit labour cost that tells us in what proportion. And we see that the difference between old and new member states is smaller with unit labour costs than with hourly costs.

““The new EU member states will have halved the difference with the EU-15 states in ten years’ time

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Professor Filip Abraham,Professor of International Economics and European Integration, Vice-Rector at the Catholic University of Leuven (Belgium)

so the new member states are not that attractive after all?The advantages related to hourly labour costs alone must be put into perspective. Studies have already shown that Poland and Hungary are no longer competitive in some sectors. But we also need to bear in mind that wage costs in these new member states are increasing because their productivity is improving! And that’s a good argument for setting up business there! In my view, the main risk lies rather in what I call the “benchmarking effect”, when the employees of subsidiaries in low-cost countries compare their wages with those of the parent company. Taken to its extreme, that can result in demands for readjustments that bear no relation to actual productivity levels. That’s a risk that cannot be ignored; we saw it recently in the strikes at Renault’s subsidiary in Romania, Dacia. In short, making labour costs the sole motive for setting up business in a foreign country is not a wise calculation. The country must offer the company other advantages such as centres of expertise, suitable infrastructure, potential for innovating, etc.

What about differences between eu-15 member states? Hourly costs are much higher in some countries, such as France, Germany, Belgium and Norway, than in others such as the United Kingdom, Spain, and Greece. Remember that the hourly cost is the sum of a wage component – gross wage – and a non-wage component, most of which is usually given over to social welfare. These factors vary from one country to another. In Spain or Greece, wages are lower. In the UK, the social welfare system is less developed, so contributions are lower, which is why hourly costs remain moderate.

Professor filip abraham is Vice-rector for Humanities and social sciences at the catholic university of Leuven (Belgium), where he teaches international economics and european integration. He is also professor of international Business in the Vlerick Leuven gent Management school. He is an external contributor for the european commission and a consulting expert to multinational companies such as Philips, siemens, Hoechst and iBM. Pr abraham holds a Ph.D. in economics from the university of Michigan and is a member of the editorial board of the Journal of international trade Law & Policy.

He is the author of many articles and publications, including:

“the rise of china: Prospects for regional trade” (2005), review of World economics, vol 141, no 3, p 486-509, co-author

“sectoral employment effects of trade and Productivity in europe” (2003), applied economics, vol 35, p 223-238, co-author

“global and european Labor costs” (2002), tidjschrift voor economie en Management, vol XLVii no 3, p 373-398

>>What about countries with high labour costs?At the top of the scale, where hourly labour costs are fairly similar, the ratio between the wage and non-wage components varies. Wages are high in Switzerland, Norway and Denmark, so welfare contributions are less of a burden. And yet these countries benefit from excellent social services, which are funded through “general” taxes rather than through payroll taxes. In other countries, including France, Belgium and Germany, welfare contributions - i.e. the non-wage component, are the largest proportion of labour costs.

With such high labour costs, will these countries manage to keep productivity high enough to stay competitive?They are staying cautious and keeping a tight rein on their hourly labour costs. Some countries have simply opted – fully aware of the implications – to devote a large proportion to social welfare. And we are seeing that is not detrimental to their productivity – on the contrary. So they are remaining competitive, as the unit labour cost figures demonstrate here again.

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13.37

13.13

9.51

34.26

32.39

31.8

30.56

30.21

28.2

27.5

27.44

26.83

25.3

24.89

21.39

16.1512.13

12.01

7.14

6.52

6.28

5.49

5.15

4.68

4.27

2.82

1.71

Hourly labour costs

Hourly labour costs (€)

Labour costs cover wage and salary costs, more generally remunerations in cash or in kind paid by an employer to an employee as well as the employers’ social contributions plus employment taxes.

< 5

5 - 10

10 - 20

20 - 25

25 - 30

> 30

Not available

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facts & figures

Did you know?

• Baltic countries showed the highest rises in labour costs in 2007: from 17.5% in Estonia to 33.3% in Lithuania.

• Lowest increases were recorded in Germany (1.6%) and Sweden (2.2%).

• Labour productivity per person (relative to constant 100 base for EU 27):

USA: 139.0 (1997), 140.5 (2008)

EU 15: 114.7 (1997), 109.7 (2008)

Source: European Communities Eurostat 2008 – Hourly labour costs 2004, 2005, 2007

Contractual minimum monthly wages (€)

Proportion of full-time employees on minimum wages

Source: European Communities Eurostat 2008 – Labour productivity values 1997-2007, forecasts 2008

Labour productivity per person employed: variation 1997-2008

Contractual minimum monthly wages (€)

Proportion of full-time employees on minimum wages

Source: Based on European Communities Eurostat 2008

Full time employees contractual wages

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facts & figures

EU 15 countries + Norway New EU members

Relative to constant 100 base for EU 27

®

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