ASEAN and the EC: Labour Costs and Structural Change in the European Community 9789814377195

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ASEAN AND THE EC Labour Costs and Structural Change in the European Community

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modem Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Board, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

ASEAN-EC Economic Relations Series General Editors: Norbert Wagner, Tan Loong-Hoe, Narongchai Akrasanee

ASEAN AND THE EC Labour Costs and Structural Change in the European Community

Manfred Kaiser Heinz Werner Institute of Employment Research Nuremberg

ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 1989 Institute of Southeast Asian Studies The responsibility for facts and opinions expressed in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters.

Cataloguing in Publication Data

Kaiser, Manfred. ASEAN and the EC : labor costs and structural change in the European Community / Manfred Kaiser and Heinz Werner. 1. Labor costs -- European Economic Community countries. 2. European Economic Community countries -- Economic policy. 3. ASEAN countries-- Foreign economic relations-- European Economic Community countries. 4. European Economic Community countries --Foreign economic relations -- ASEAN countries. I. Werner, Heinz. II. Institute of Southeast Asian Studies (Singapore). ASEAN Economic Research Unit. III. Title. HD5014.5 K13 1989 sls89-78596 ISBN 981-3035-37-4

Printed in Singapore by Loi Printing Pte Ltd

Contents

List of Tables List of Figures Foreword Acknowledgements

vii xi xiii XV

I.

Introduction

1

II.

Concepts, Approaches, Typologies

3

III.

Labour Cost Surveys in EC Countries: Scope and Coverage

18

IV.

Empirical Evidence of Labour Costs

23

v.

Labour Cost and Output in Manufacturing

89

VI.

Unemployment, Employment Schemes and Labour Cost Implications

VII. Summary and Conclusions Appendix Bibliography

120 133 136

142

List of Tables

Table 1

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

Table 8

Table 9

Exchange Rates of National Currencies into European Currency Units (ECU): 1963 - 86

14

Total Labour Costs in Manufacturing Industries in EC Countries: 1966 - 84

24

Total Labour Costs in Manufacturing Industries in EC Countries: 1966- 84 (1975 = 100%)

30

Results of Regression Calculations of Hourly Labour Costs in European Currency Units (ECU) by Subsectors in Manufacturing Industries: 1975 - 84

51

Correlation Coefficients (Dependencies) between Different Components of Total Labour Costs: 1966 - 84

52

Development of Main Components of Labour Costs: (Linear Regression Equati~ns Calculated on the Data Base 1966 - 84) (1975 = 100%)

54

Distribution of the Number of Workers, Labour Volume and Total Labour Costs in Manufacturing Industries in the EC Countries: 1984

57

Structure of Labour Costs in Manufacturing Industries in the Federal Republic of Germany: 1972- 84

70

Structure of Labour Costs in Manufacturing Industries in France: 1972- 84

71

List of Tables

viii

Table 10

Table 11

Table 12

Table 13

Table 14

Table 15

Table 16

Table 17

Table 18

Table 19

Table 20

Table 21

Table 22

Structure of Labour Costs in Manufacturing Industries in Italy: 1972 - 84

72

Structure of Labour Costs in Manufacturing Industries in Belgium : 1972 - 84

73

Structure of Labour Costs in Manufacturing Industries in the Netherlands: 1972 - 84

74

Structure of Labour Costs in Manufacturing Industries in Luxemburg: 1972 - 84

75

Structure of Labour Costs in Manufacturing Industries in United Kingdom: 1973- 84

76

Structure of Labour Costs in Manufacturing Industries in Ireland: 1975 - 84

77

Structure of Labour Costs in Manufacturing Industries in Denmark: 1972 - 84

78

Results of Regression Analyses of the Structure of the Labour Costs by EC Countries: 1972 - 84

80

Comparison between Compensation of Employees and Labour Costs in Manufacturing Industries: 1972 - 84

86

Gross Domestic Product in EC Countries in Million ECU (106)

90

Value Added in Manufacturing in EC Countries in Million ECU (106)

92

Gross Domestic Product at Current Prices in the Total Economy and Manufacturing

94

Labour Costs and Output (Value Added) in Manufacturing Industries in EC Countries in ECU

99

Labour Costs and Structural Change in the EC

Table 23

ix

Labour Costs and Output (Value Added) in Manufacturing Industries in EC Countries based on ECU (1975 = 100%)

103

Output and Unit Labour Costs in Manufacturing Industries in EC Countries in National Currencies and ECU: 1966-84

106

Regression Coefficient b (y = a + bx) for Labour Costs and Output (Value Added) in Manufacturing Industries in EC Countries based on Indices (1975 = 100%) and ECU

114

Annual Percentage Changes in Manufacturing Output, Labour Input and Unit Labour Cost

117

Key Performance Indicators (Non-agricultural Business) Average Annual Percentage Change: 1961 - 65

118

Table 28

Changes in the Structure of Unemployment: 1975 - 85

121

Table 29

Unemployment-Related Budgetary Expenditure

129

Table 24

Table 25

Table 26

Table 27

List of Figures

Components of the Total Labour Costs in a National Economy

6

International Standard Classification of Labour Cost (ISCLS)

8

Relationship between Labour Cost and Compensation of Employees

10

Classification of Labour Costs by Eurostat - Standard

12

Figure 5

Survey Methods and Scope of Sample

20

Figure 6

Number of Wage Earners and Salaried Employees(Workers) in Manufacturing Industries in the EC Countries: 1966 - 84 (1975 = 100%)

37

Average Number of Hours Worked During the Year in Manufacturing Industries in the EC Countries: 1966- 84 (1975 = 100%)

41

Hourly Labour Costs of Manual and Non-manual Workers in Manufacturing Industries in ECU: 1966- 84

45

Figure 1

Figure 2

Figure 3

Figure 4

Figure 7

Figure 8

List of Figures

xii

Figure 9

Figure 10

Figure 11

Figure 12

Figure 13

Figure 14

Figure 15

Figure 16

Figure 17

Hourly Labour Costs of Manual and Non-manual Workers in Manufacturing Industries in ECU: 1966 - 84 (1975 = 100%)

48

Regression Trends between Number of Workers and Annual Working Time for the Various EC Countries: 1966 - 84

59

Regression Trends between Hourly Labour Costs and Annual Working Time for the Various EC Countries : 1966- 84

61

Regression Trends between Hourly Labour Costs and Number of Workers for the Various EC Countries: 1966 - 84

64

Trends of Direct and Indirect Labour Costs in Manufacturing Industries in the EC Countries: 1972 - 84

67

Annual Labour Costs by Size of Establishment in the United Kingdom: 1984

83

Annual Labour Costs by Size of Establishment in the Federal Republic of Germany: 1984

84

Hourly Labour Costs and Output per Hour of Manual and Non-manual Workers in Manufacturing Industries in ECU

96

Summary of Schemes with an Impact on the Labour Market in the Community Member States 1984/85

122

Foreword

Structural change is the essence of economic growth both at the national and international level. Without structural change, stagnation will set in. The production structure in a country at a given point of time is the result of interactions between a number of factors, ranging from the demographic pattern and skill composition of the economically active population, to the available financial resources, the technology and the institutional framework. In addition, the structure of manufacturing is obviously also influenced by the patterns of demand. Changes in these supply and demand factors will affect the production structure and thus lead to structural change. The production structures of individual countries are increasingly linked and interdependent at the global level through international economic relations like trade in goods and services as well as movements of labour, capital, and other resources. Accordingly, changes in the production structure in one country will affect the structure of production in other countries and, hence, may have significant implications for the factors of production in these countries. Some factors bf production may be adversely affected while others may benefit. Institutional changes may be required in order to adjust to the modified economic environment. Moreover, technological change may bring about yet unknown new developments in terms of products and production processes. The present study is part of an international research project on "The Development of Manufacturing in ASEAN and the EC and the Potential for further ASEAN-EC Co-operation". This project is one component of the long-term research programme on ASEAN-EC Economic Relations launched by the ASEAN Economic Research Unit, Institute of Southeast Asian Studies, Singapore, with the generous support of the Konrad Adenauer Foundation, Federal Republic of Germany.

Foreword

xiv

The project on the development of manufacturing in ASEAN and the EC comprises studies on institutions and structural change; trends in the cost of labour and their effects on the production structure. trends in the cost of capital and their effects on the production structure; and trends in technological change and their effects on the production structure. These trends and their impact on structural change are analysed in the context of both the economies of ASEAN and those of the EC. This international research effort will promote a better understanding of the nature and causes of structural change in each regional grouping as well as the mutual impact of this change may have on both regions. We hope this study and others in the series will stimulate new ideas and reveal other areas for further ASEAN-EC cooperation.

Norbert Wagner Institute of Southeast Asian Studies

Tan Loong-Hoe Institute of Southeast Asian Studies

Narongchai Akrasanee November 1988

Thailand Development Research Institute

Acknowledgements

This paper was prepared under the auspices of the international research project on "ASEAN-EC Economic Relations: The Development of Manufacturing in ASEAN and the EC and the Potential for Further ASEAN-EC Co-operation" launched by the Institute of Southeast Asian Studies (ISEAS), Singapore, with financial support from the Konrad Adenauer Foundation. Comments by Torsten Amelung and participants of a workshop on "ASEAN-EC Economic Relations: The Development of Manufacturing in ASEAN and the Potential for Further ASEAN-EC Co-operation", organized by ISEAS, are gratefully acknowledged.

I. Introduction

As is well known, the production structure in a country at any given point of time is a result of a number of factors, ranging from the demographic structure and skill composition of the economically active population, to the available financial resources, the technology available and the institutional arrangements prevailing. In addition to this supply side view of the structure of manufacturing, changing patterns of demand will obviously also influence the structure of manufacturing. This report will elaborate on the influence of labour cost on manufacturing. The first chapter deals with concepts, approaches, typologies and patterns of labour costs. The following components of the concept of "total labour cost" will be examined for analytical purposes: labour volume, hourly labour cost, annual labour cost per worker, hourly labour cost of the employed workforce. The pattern of labour cost will be discussed in terms of direct and indirect labour costs. A second chapter concerns a data base used for labour cost analyses in the European Community (EC) countries. A third chapter provides empirical evidence of the labour costs, their trends since 1966 and correlations between the basic variables of the "total labour cost-concept". Besides this expenditure, directly attributable to the production process, there also exist indirect labour costs in the economy as a whole which are difficult or impossible to quantify, like human capital costs embodied in the workers through education and training, recruitment or redundancy costs. An important part of overall labour costs consists of the payments to jobless persons and on expenditure for employment and training schemes for previously unemployed persons. As such, a chapter elaborates on the labour cost implications of unemployment on the public budget. Another chapter is devoted to the comparison of labour costs data -- as previously discussed -- and the production data. The question as to whether there is a relationship between the level of labour costs and the level of production -- as described earlier -- is examined by country. In other words: do high-cost countries experience lower economic growth or vice versa? In this context, some consideration will have to be given to productivity.

2

Introduction

High labour costs per se do not necessarily entail production constraints or transfers of production facilities to low-cost countries, provided these high labour costs are associated with a higher output due to higher productivity. International comparisons of monetary values are hampered by differing price trends. This may lead to biased results if exchange rates do not reflect economic developments but vary as a consequence of speculative monetary flows. The problem of "true" exchange rates and their influence on the validity of labour costs may be of particular importance for highly export-oriented countries. To keep inflation and exchange rate distortions to a minimum and to enable inter-country comparisons, national currencies were converted into European Currency Units (ECU) if not already directly available from the Labour Cost Surveys of the Statistical Office of the European Communities (Eurostat).

11. Concepts, Approaches, Typologies Costs of production (of goods and services) can be split into two components: labour and capital costs. Capital costs encompass interest payments, payments for equipment and energy, taxes on capital gains as well as qualitative elements like delivery periods, technology and quality standards, after-sales-service, and so forth. Labour cost may serve many goals and functions including especially those of (Zoeteweij 1986, p. 17) attracting and retaining a labour force; motivating the labour force; increasing its productivity; creating a favourable public image for the enterprise; increasing security of employment and workers' incomes; protecting or increasing workers' real incomes and their general wellbeing. In market economies, the first four of these functions could be regarded as employers' objectives, the others with workers' interest. Labour costs from an overall economic viewpoint include the cost of labour involved in the production process as well as social costs arising for those persons who withdraw from the labour force, for example, job-seekers or unemployed persons. Both types of costs are considered in the following analytical framework.

Analytical Framework In the simplest way costs of labour involved in the production process (TC) can

be determined by average number of workers (L), average working time, for example, in terms of average hours worked per annum and per worker (T), average cost per hour ( = hourly labour cost) (C).

Concepts, Approaches, Typologies

4

The total labour cost for the employed work-force (TC) in a sector or even in the economy as a whole will then be obtained by the multiplication of its above mentioned components: TC = L. T . C (currency units) The labour cost can be measured in national currency units or for purposes of comparison or assessment of competitiveness in a common currency, such as the U.S. Dollar or European Currency Units (ECU). The latter is used for this report. Social costs -- as mentioned above -- are difficult to quantify for the national economy as a whole and it is much more difficult to attribute an adequate share to the various sectors. An important part consists of payment to jobless persons, particularly of supplementary benefits, which are mainly funded by tax-yields. Total expenditure for unemployment (EU) can be obtained -- in line with the previous calculation of labour costs for production-- by multiplying annual average number of unemployed persons (U), average duration of unemployment per year and unemployed person, as far as he/she receives supplementary unemployment benefits (D), average level of (supplementary) unemployment benefit per annum and per unemployed person (B). Consequently, the annual cost of unemployment amounts to EU

=

U . D . B (in national or European Currency Units)

The persons defined as unemployed in the EC countries vary according to type of work sought (for example, full or part-time employment), personal characteristics (for example, upper/lower age limits, treatment of students or retirement pensioners) or to record-keeping (treatment of temporary inability to work, checks on continued unemployment, and so forth). The prospect of receiving benefits may also be an important reason for registering at an employment office. Thus, the total costs of the employed and job-seeking labour force (TEJC) can be calculated in an economy as a whole to TEJC = TC + EU = L. T. C + U. D. B After setting out this general analytical framework the term "total labour cost for the employed work force (TC)" will be analysed in more detail. Insights will be drawn from simplified submodels which represent restrictions on the general framework. The total annual labour costs of the employed work-force

Labour Costs and Structural Change in the EC

5

(for the whole economy or a sector) can also be defined by the following tautological equations: TC

=

(L . T) . C = L . (T . C) = T . (L . C)

Three basic subconcepts can be derived from these equations, which describe and define various aspects of labour costs: 1. labour volume defined as the multiplication of the average number of workers (L) and of annual working time (T) : L . T (in hours), 2. annual-labour costs per worker defined as the multiplication of the average working time per annum (T) and of hourly labour costs (C): T . C (in national and/or in European Currency Units), 3. hourly labour cost of the employed work-force defined as the multiplication of the average number of workers (L) and of the hourly labour costs (C): L . C (in national and/or in European Currency Units) .

•

Components, subconcepts of labour cost, their dependencies and importance are shown in Figure 1.

Dynamic Aspects

This above comparative static (ex-post) approach has limits to its usefulness. Indeed, one of the major arguments for the need to introduce a dynamic time perspective into the foregoing approach is concerned with the very fact that it does not incorporate firstly, development and change perspectives over time and secondly, dependencies and correlations between the variables of the labour cost concept. The different labour cost components are interrelated: firms are likely to change the composition of their labour volume in response to hourly labour cost variations and vice versa. Of particular interest is that this dynamic setting enables testable hypotheses for all the relevant labour cost components and their future development. These hypotheses will be tested by the labour cost surveys in the EC countries, which have been conducted since 1966 for the Federal Republic of Germany, France, Italy, the Netherlands, Belgium and Luxemburg and since 1975 for the United Kingdom, Ireland and Denmark. Imperfect data of the various labour cost components only are available for the latest members of the European Community: Greece, Spain and Portugal.

Classification of Labour Costs

The following explanations provide information on the national concepts and definitions, on which the International Standard Classification of Labour Cost (ISCLC) is based. Two concepts are in operation for statistical purposes: the

FIGURE 1 Components of the Total Labour Costs in a National Economy

hourly labour costs of the employed work force

l

I Total labour costs (in national or European Currency Units)

-

average number of workers per annum

X

I

annual working time in hours

X

hourly labour costs (in national or European Currency Units)

I

II labour volume (in hours)

annual labour costs per worker (in national or European Currency Units)

Labour Costs and Structural Change in the EC

7

concept of "labour cost" and the concept of "compensation of employees". The former has been mainly applied by the International Labour Office (ILO) and the latter by the United Nations (UN) for a System of National Accounts, reporting national income statistics. The statistical concept of labour cost comprises remuneration for work performed, payments in respect of time paid for but not worked, bonuses and gratuities, the cost of food, drinks and other payments in kind, the cost of workers' housing borne by employers, employers' social security expenditures, loyment and bridging 12ensions Unemployment Bridging Miscellabenefits pensions neous

1975 1980 1983 1984 1985

34.4 69.7 118.7 121.2

1975 1980 1983 1984 1985

47 192 486 539

United Kingdom2

1975 1980 1983 1984 1985

443 1280 1 497 1 578 1 597

Ireland

1975 1980 1983 1984 1985

Luxemburg

40.4 88.2 264.7 259.0 276.5

2

3

18.5 39.0 41.0

2.1 20.7 19.6 26.8

501 1 077 1 341

Others expenditures 2

Total

Benefits as a percentage of total

Total as a percentage of GDP

4

5-1:4

6-1:5

7

36.5 108.9 177.3 190.6

94.2 64.0 66.9 63.6

1.6 3.1 4.2 4.2

10 203 1 381 915

466 4 836 302

523 900 3 780 3 097

9.0 21.3 17.4 76.2

0.6 0.7 2.1 1.6

382 1 250 4 253 4 772 5203

390 1 696 2 551 2 698 2 936

1 215 4 226 8 301 9 048 9 736

36.5 30.3 18.0 17.4 16.4

1.0 1.8 2.7 2.8 2.7

47.0 48.8 50.7 43.5 39.8

2.3 1.9 3.6 3.6 3.9

45.5 86.9 241.6 217.7 380.9

5.8 15.4 18.8 37.7

85.9 180.9 521.7 595.5 695.1

TABLE 29 (continued)

Year

Unemployment and bridging pensions Unemployment Bridging Miscellabenefits pensions neous

-Denmark

Greece

1975 1980 1983 1984 1985 1975 1980 1983 1984 1985

11.02 20.50 21.05 19.50

5 427 12 300 16 900 24000

2

3

3.97 6.76 7.55 7.87

0.31 2.79 2.88 3.87

2 800 5 800 14 500

Others expenditures 2

Total

Benefits as a percentage of total

Total as a percentage of GDP

4

5-1:4

6-1:5

7

15.30 30.05 31.48 31.24

72.0 68.2 66.9 62.4

(3.0)E 4.1 5.9 5.6 5.2

61.2 56.9 53.9

0.3 0.7 0.8 1.0

5 000 7 000 6000

5 427 20 100 29 700 44 500

Spain Portugal EUR10

1

1975 1980 1983 1984 1985

In '000 million for BFR, DKR, DM, DR, FF, LIT, HEL; in million for IRL, LFR and UKL. Financial years.

SOURCE: Commission of the European Communities.

1.1 1.4 2.4 2.4 2.4

132

Unemployment, Employment Schemes and Labour Cost Implications

Since the beginning of the 1980s, budgetary policy has placed a twin role in the drive against inflation: (a) in the medium term, as various Member States have launched stabilization policies aimed at reforming public spending and lowering the level of taxation, and (b) in the short term, as expenditure on unemployment benefits has risen rapidly and as a whole range of selective measures has been taken to alleviate the burden of unemployment for the less well-off, to improve vocational training and to introduce early retirement. Although it is particularly difficult to make an exhaustive assessment, it would appear that total spending on unemployment, expressed as a proportion of Community GDP, climbed steadily before stabilizing at around 2.5 per cent in 1983. However, there are considerable differences between countries. The different levels of expenditure for unemployment benefit and employment and training schemes have a bearing on total labour cost for each country. They have to be added to the cost calculations already made in previous chapters for the manufacturing sector. To do this for intra-country comparisons it is necessary to determine which percentage part of expenditure accounts for manufacturing. This is not possible to determine. A further difficulty would be to assess which part of unemployment related expenditure had already been taken into account in the previous labour cost calculations -as unemployment security contributions. A quote a report of the Commission of the European Community on this subject underlining the importance of the increasing total spending on unemployment sums up this chapter: "This has inevitably given rise to difficulties of budget management, already encumbered with the similarly rapid increase in the cost of the public debt since the first oil crisis, making it even more imperative that other forms of spending, notably in investment, should be trimmed back. Furthermore, the burden of taxation and para-fiscal charges has continued to affect firms' labour costs and has contributed to the decline in profitability and to the substitution of labour by capital that have long been discernible in the Community. The upshot is a vicious circle in which unemployment leads to an increase in labour costs relative to the cost of capital, renting labour to be replaced by capital and ultimately, engendering a further rise in unemployment" (Commission Document 11/481-85 Rev., p. 13).

VII. Summary and Conclusions

Following heavy employment decline, the EC countries (excluding Spain) employed between them about 24.9 million wage earners and salaried employees in manufacturing industries in 1984. This combined work force offered a total labour volume of about 45,000 million working hours and generated total labour costs of (nominal) 503,633 million ECU. The number of wage earners and salaried employees and the total labour volume on the one hand, and the total labour costs on the other hand are unequally distributed between individual EC countries. While, for example, the Federal Republic of Germany with 30.9 per cent of the work force and 30.2 per cent of the labour volume of the European Community generated 36.5 per cent of the total labour costs, in contrast the United Kingdom with 22.7 per cent of the European Community's work force contributed 24.5 per cent of the labour volume, but generated only 18.5 per cent of the total labour costs in manufacturing. In all the EC countries the following have increased markedly: the hourly labour costs of manual and non-manual workers; the annual labour costs per worker; the hourly labour costs of all wage earners and salaried employees; and the total labour costs in national currency as well as in European Currency Units in the manufacturing industries since 1966. Non-wage labour costs ( = indirect labour costs) comprise between 7 and 31 per cent of total labour costs within the EC bloc of countries in 1984. Fixed non-wage labour costs account for up to 20 per cent of total labour costs in most countries. Moreover, both total and fixed non-wage labour costs have grown systematically in relative importance over several decades and -- in many countries -- are likely to continue to expand their total labour cost shares. Yet, despite these considerable magnitudes and trends, research work and policy analysis has focused attention -- until very recently -- almost exclusively on the role of direct wages. This deficiency is compounded when it is considered that there now exists a good base of theoretical literature which has identified a set of distinctive labour market effects of non-wage components (Hart et a!. 1988). The distinction between fixed and variable labour costs necessitates the explicit division of the labour input into stock and utilization components. Stock dimensions are measured in terms of "number of wage earners and

134

Summary and Conclusions

salaried employees" and utilization dimensions in terms of "average hours worked during the year". Both basic dimensions can be weighted by cost components (normally in terms of "hourly labour costs"), thereby enabling new labour market indicators to be derived and analysed, such as: "labour volume", "annual labour costs per worker", "hourly labour costs of all wage earners and salaried employees" and "total labour costs". A most important topic of current interest is the relative flexibility of the composition of these cost components. Labour costs, working time, work force and labour volume can be combined in different ways, to produce ~ desired output. Thus, the various EC countries reacted in different ways to labour cost increases. While the Federal Republic of Germany, Italy, the Netherlands and Belgium responded with sharp reductions in their work forces and with a slow shortening of the working time, Luxemburg and France exhibited an opposite trend. In the United Kingdom and Denmark the reduction of the work force played the main role as a response to growing labour costs, whereas working time reductions were not so important. Some economists hold the view that such a high flexibility is an essential step in combating unemployment successfully; in essence, working time, labour volume and wages are seen as providing a buffer to fluctuations in aggregate demand leaving the employment stock relatively immune from the effects of "surprise" economic events. Hart eta!. (1988) show in sharp contrast to Japan that the internal labour market in Europe has manifested stricter rigidities and a lower degree of inbuilt flexibility. This has been particularly reflected in the European debate on the length of working time. European unions have envisaged work distribution in the face of high unemployment in the form of systematic, once for all reductions in weekly or annual hours of work. In all European countries, statutory social welfare contributions form the largest component of indirect labour costs. These contributions take the form of taxes on that section of the firm's payroll which lies between specified lower and upper wage limits. Such costs have grown to meet the growing demand for resources for state pensions, health provision and unemployment benefits. Statutory social welfare contributions can be understood as a "tax on jobs" and are, thus, detrimental to employment prospects and, moreover, lead to capitallabour substitution if the statutory social costs increase more rapidly than labour productivity. Labour costs show only one aspect of the state of a national economy. The other aspect is productivity, here expressed as output per employee or output per hour. If productivity increases are in line with labour cost increases they can pave the way for increases in wages or social security contributions. The data shows that for both high- and low-cost countries productivity (output per hour) has consistently outpaced costs. It is true that Denmark and the Fedral Republic of Germany --both high-cost countries -- lay somewhat behind this commonly observed trend and that Italy and the United Kingdom -- as

Labour Costs and Structural Change in the EC

135

lower-cost countries-- experienced higher output and productivity levels during the ten years prior to 1984. To a large extent this has been achieved by shedding labour in manufacturing industries. Whatever the importance of labour costs, they are only one factor influencing the competitive position of a country's products in the international markets. Fundamentally, there are price and non-price factors. While the latter usually defy quantification, export prices are determined by unit labour costs, all other (non-labour) costs, and the marketing policy of exporters. If comparative labour cost figures are meant to be used as an indicator of competitiveness between countries, unit labour costs have to be calculated. These are based on the relationship of hourly labour cost to output per hour. There is a long-term relationship between unit labour cost trends, output and productivity. However, in the last few years this relationship has weakened. Unit labour costs decreased in all European countries in 1984 and have consistently fallen for some time in Italy, the Netherlands, the United Kingdom and more recently also in Belgium. If these findings are put into the context of EC-ASEAN relations it can be concluded that an additional future need to move production facilities to low labour cost ASEAN countries cannot be expected. With persisting high levels of unemployment in all EC countries there is a reservoir of manpower available. Moreover, European firms have increased efficiency by investing in plant and equipment and have raised labour productivity. One reason for this is given by the efficiency wage hypothesis which explains why firms may not cut (high) wages in spite of the existence of high unemployment because any reduction in the wage paid would power the productivity of all employees already on the job (Yellen 1984). With the creation of a single European internal market by January 1993 barriers to the free movement of goods, services and capital are to be abolished. With low-cost countries like Spain, Greece or Portugal being Members of the European Communities, European industrial firms may find it preferable to invest in those countries rather than in third countries except where factors like market access, market presence and so forth dominate. This tendency to concentrate more on EC trade and investment will be reinforced by the considerable increase of the so-called structural funds (regional fund, social fund, agricultural fund) in terms of financial assistance to develop the less industrialized regions of the EC.

APPENDIX

LABOUR COST CONCEPTS IN LABOUR COST SURVEYS IN EC COUNTRIES

Federal Republic of Germany: Concept used •· labour cost (Source: labour cost survey) Direct wages and salaries (as in the International Standard Classification of Labour Costs [ISCLC]). Remuneration for time not worked (as in ISCLC). Bonuses and gratuities (as in ISCLC). Food, drink, fuel and other payments in kind (as in ISCLC). Cost of workers' housing borne by employers (as in ISCLC). Employers' expenditure on social security (as in ISCLC). Cost of vocational training (as in ISCLC). Cost of welfare services (as in ISCLC). Other labour cost not elsewhere classified. Taxes regarded as labour cost.

France: Concept used -- labour cost (Source: labour cost survey) Direct wages and salaries (as in ISCLC). Remuneration for time not worked (as in ISCLC). Bonuses and gratuities (as in ISCLC). Food, drink, fuel and other payments in kind (as in ISCLC). Cost of workers' housing borne by employers (as in ISCLC). Employers' social security expenditure: Statutory social security contributions. Collectively agreed, contractual and non-obligatory contributions to private social security schemes and insurances. Direct payments to employees in respect of absence from work due to sickness, maternity or employment injury, to compensate for loss of earnings and other direct payment to employees regarded as social security benefits. Cost of vocational training (as in ISCLC), Cost of welfare services: cost of canteens and similar food services; cost of educational, cultural and recreational facilities and services, including costs of holiday camps and centres, Christmas trees, and so forth. Other labour cost not elsewhere classified: cost of work clothing, cost of workers' transport between home and normal place of work. Less subsidies received by employers aimed at reducing labour cost, in order to encourage employment.

Labour Costs and Structural Change in the EC

137

Netherlands: Concept used -- labour cost (Source: labour cost survey) Direct wages and salaries (as in ISCLC). Remuneration for time not worked (as in ISCLC). Bonuses and gratuities (as in ISCLC, but excluding profit-sharing bonus). Food, drink, fuel and other payments in kind (as in ISCLC). Cost of workers' housing borne by employers (as in ISCLC). Employers' social security expenditure (as in ISCLC). Cost of vocational training (as in ISCLC). Other labour cost: cost of transport between home and work-place, cost of work clothing, others. Belgium: Concept used -- labour cost (Source: labour cost survey) Direct wages and salaries, regular bonuses and gratmt1es: wages and salaries paid for hours actually worked, including payments relating to overtime, night work, or work on Sundays and public holidays; cost-of-living or dearness allowances: bonuses and gratuities paid regularly each pay period (such as production or productivity bonuses; premiums for duties, responsibilities, regularity, hard work, seniority, dangerous, dirty or unpleasant work, shift work; allowances paid for work at a place other than the normal place of work; allowances for snacks, and so forth; compensatory wages or salaries for reduced working hours). Other bonuses and gratuities not paid regularly each pay period: bonuses for Christmas, end of year, thirteenth month, and so forth; production or productivity bonuses not paid each pay period; supplementary vacation allowances and holiday bonuses; net amounts paid by the employer to holiday funds. Remuneration for days not worked: all paid vacation and paid leave, as well as payments for leave not taken, including supplementary leave for mothers and seniority leave; public holidays and other days not worked but paid for (including the day of an industrial accident, the birth of a child, death of a spouse or close relative, marriage of employee, unpaid honorary duties, family council, army medical board, home removal and employer's request, marriage of family member, various ceremonies, absence for civic duties, absence for union duties, and so forth); indemnities for lay-off or in lieu of notice. Employers' social security costs: Statutory costs: employers' contributions for social security; other legally required contributions for accidents at work, paid either directly to employees or through private organizations; guaranteed payment of wages and salaries in case of accident or illness: other legally required costs. Contractual, collectively agreed or voluntary costs: contributions to complementary schemes run by the employer or the industry; complementary pension schemes; guaranteed wages or salaries in case of accident or injury;

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Payments in kind: cost to employer of products provided free to employees or sold to them at less than cost price; food and drink, coal, gas, electricity, oil, heating, footwear, clothing (except canteens and work clothing); and housing paid for by the employer (housing owned by the establishment, including hostels for single employees). Other expenditure for social welfare: expenditure by the employer on purchase, maintenance and distribution of work clothing and protective clothing; subsidies for services such as medical services, canteens, holiday camps and centres. Christmas trees, leisure facilities, libraries, and so forth; grants for studies; subsidies for cultural activies; contributions to union funds; recruitment costs (transport expenses to interviews and cost of installation, and so forth); expenditure for training activities of a purely social or cultural nature; transport costs for workers between home and normal place of work. Cost of vocational training: wages and salaries paid to apprentices and trainees; costs of theoretical and practical courses for employees; fees for outside instructors; expenditure on materials, fuel, tools and maintenance of building and machines used exclusively for vocational training; contributions or subsidies paid by employer to institutions providing vocational training. Less: value of output produced by persons receiving training and sold clients or staff; subsidies and so forth received by employer from the State for vocational training. Taxes: taxes based on employment or payrolls. Subsidies: subsidies relating directly to labour cost, such as subsidies received from the State for the engagement of young trainees.

Luxemburg: Concept used -- labour cost (Source: labour cost survey) Direct remuneration: wages and salaries paid for hours actually worked, including payments for overtime, night work, work on Sundays and public holidays, cost of living allowances, regular bonuses and gratuities. Other bonuses and gratuities not paid regularly: end-of-year and Christmas bonuses, thirteenth month, vacation bonuses, productivity and profit-sharing bonuses. Remuneration for days not worked: payments for paid leave, including supplementary leave for mothers and for long service, as well as allowances for leave not taken; public holidays and other days paid for but not worked; severance and termination pay; Employers' social security and family allowance expenditure: legally required expenditure: guaranteed wages and salaries in case of sickness, contributions of employers towards occupational and other insurance, contributions towards funds providing family allowances, and others. Contractual, collectively agreed or voluntary payments; contributions to complementary schemes covering

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sickness, maternity, invalidity, occupational illnesses and industrial accidents, employers' contributions to life assurance schemes and pension funds, and so forth, payments made to workers to compensate for loss of earnings due to illness or accident, amounts paid directly by employers to employees as family supplements. Payments in kind: products provided free of charge or at less than cost price, in the form of coal, coke, gas, electricity, drinks, food, footwear, clothing, and so forth, as well as allowances provided directly to employees for these items; housing provided free of charge, housing allowances and non-reimbursable or interest-free loans to employees for housing. Other welfare expenditure: expenditures for medical services, canteens, holiday camps and centres, Christmas trees, leisure activities, libraries, and so forth, education grants; subsidies of a cultural nature; value of work clothing; various contributions to union funds or for union activities; cost of workers' transport between home and normal place of work, including company cars; cost of recruitment and trainees; employers' contributions for their social security; course expenditure; fees paid to outside instructors; running costs; payments to outside organisations providing training; special taxes for vocational training; and grants for vocational training. Subsidies relating directly to labour cost in general, in particular subsidies relating to Notstandarbeiten (relief work).

United Kingdom: Concept used -- labour cost (Source: labour cost survey) Wages and salaries: gross total amounts paid to employees, pay supplements, pay for overtime, night work and weekend work; payments under bonus, productivity and other incentive schemes; commissions and gratuities; payments of annual, public and customary holidays; payments for sickness, injury and maternity absence; payments in lieu of notice; other payments for time not worked (including guaranteed payments, payments for attending training courses); and miscellaneous additional allowances (such as cost-of-living allowances). Employers' National Insurance Contributions. Redundancy payments and rebates. Voluntary social welfare expenditure: contributions of funds which provide pensions, superannuations and other retirement benefits and death benefits for employees and to funds which provide for widows, orphans and other dependants of employees, including insurance premiums for providing free or subsidized life insurance for employees; amounts set aside by way of insurance premiums or payments to special sickness funds to provide benefits to employees while while absent from work on account of sickness or maternity, industrial injury or diseases caused by work; amounts paid directly to employees, their

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dependants or other beneficiaries in respect of retirement, sickness, accident or death, including ex gratia and goodwill payments and marriage gratuities, awards for long service, and so forth, other voluntary payments (to funds or schemes which provide medical benefits, family allowances or educational allowances for employees and their children). Benefits in kind: cost to the employer of goods provided free or below cost price to employees, dependants or former employees, sucuh as food, drink, fuel, and so forth, and luncheon vouchers. Housing expenditures: for accommodation owned by employers and assistance to employees with rent and interest foregone or housing loans at reduced rates. Subsidized services to employees: cost of canteens, staff restaurants, and so forth; cost of first-aid rooms, rest rooms, other medical, dental and health services provided by the employer; cost of sports grounds, pavilions, club houses, reading rooms and other educational services; cost of staff magazines; cost of provision of works' bus, assistance with fares, repayment of normal daily travelling expenses, company cars; cost to employer of uniforms, overalls, protective clothing and footwear. Vocational training: cost of courses, fees paid to instructors, running costs, and so forth; amount of levy actually paid or to be paid to industrial training boards; grants received or due from industrial training boards. Government subsidies: amounts received under special employment measures, such as Temporary Employment Subsidy (and supplement), Youth Employment Subsidy and other special employment measures in operation.

Ireland: Concept used -- labour cost (Source: labour cost survey) Total wages and salaries paid to employees: all wage and salary payments, overtime, shift allowances, holiday pay and bonuses, and so forth; sick pay (paid by employer) and redundancy payments (lump sum less rebates) and payments of wages and other liabilities to employees in lieu of notice. Employers' contributions to social security: statutory contributions by employers; cost to employer of social insurance stamps and contributions with respect to pay-related benefits. Voluntary contributions or benefits: employers' contributions to superannuation Funds and payments of Life Assurance premiums by employers on behalf of employees; amounts of pensions paid

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directly by employers to past employees and their dependants; payments of insurance premiums by employers on behalf of employees for sickness or injury (additional to statutory requirements); other non-statutory payments of a social security nature (such as family allowances, payments related to birth of a child, and so forth, excluding payments in kind). Payments in kind and costs associated with providing accommodation for employees: costs of accommodation owned by the firm or not owned by the firm, and reduced-interest housing loans; goods and services supplied either free of charge or at a reduced rate. Other social expenditure: all other labour costs or costs of a social nature such as canteens, medical services, provision of recreational facilities, cost of protective clothing (including laundry costs), cost of providing scholarships (other than for job-related training), library facilities, cost involved in providing tea or coffee at breaks, in subsidizing meals or in supplying luncheon vouchers, expenses in relation to relocation of employees, and transport expenses relating solely to employees' transport between home and the usual place of work; cost of firm of providing reduced-interest car loans; cost to firm of private use of company cars. Vocational training: wages and salaries of apprentices and associated social security expenditure of employers; AnCO levies less rebates; cost relating to course arranged for trainees including payments made to lecturers hired externally; fees for training courses; incidental expenses; scholarships.

Denmark: Concept used -- labour cost (Source: labour cost survey) Direct wages and salaries (as in ISCLC). Remuneration for time not worked; annual vacation, other paid leave, including long-service leave; public holidays and other recognised holidays. Bonuses and gratuities: additional payments in respect of vacation, supplementary to normal vacation pay and other bonuses and gratuities. Food, drink, fuel and other payments in kind. Employers' social security expenditure: statutory social security expenditure and collectively agreed, contractual and non-obligatory contributions to private social security schemes and insurances. Cost of vocational training (as in ISCLC). Labour cost not elsewhere classified.

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THE AUTHORS Manfred Kaiser, Ph.D., is senior research officer at the Institute of Employment Research in Nuremberg. He has written extensively on occupational flexibility, education and labour market issues and he has acted as consultant to national and international institutions. Heinz J. Werner, Ph.D., is senior research officer at the Institute of Employment Research in Nuremberg. He has worked in international organizations like the UN Economic Commission for Europe, the Commission of the European Communitities and the Organisation for Economic Co-operation and Development and has published extensively on international aspects of the labour market. He has also acted as consultant to national and international institutions.