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

A VISION ON #3
COST AND PRODUCTIVITY SEPTEMBER 08

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.

Gilbert Cette Albert Martens Filip Abraham

Gilbert Cette, Associate Professor of Albert Martens, Professor Filip Abraham, Professor of
Economics at the University of the Director, in charge of HR International Economics and European
Mediterranean and Member of the Global Transformation at IKEA. Integration, Vice-Rector at the Catholic
French Economic Analysis Council University of Leuven (Belgium)

"Productivity is a prism "Labour costs alone are not


for observing qualitative IKEA: productive by being motive enough to set up
performance factors" human business in a country"
Page 2 Page 4 Page 6

Facts and
figures
p. 8-9

An ADP publication
COST AND PRODUCTIVITY

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.

What are the main factors multinationals certainly helped short of the European average
governing a country’s productivity to improve productivity, and productivity although they are
level? GDP was artificially boosted by Eurozone member states.
The main factors are structural. large companies’ declaring their
They relate to the way the profits in the country. Why don’t you hold Luxembourg
country works and its ability But that in no way detracts from or Norway up as models?
to mobilise the most efficient the structural factors behind It’s true, these two countries
organisations and technologies. Ireland’s performance. It has have the highest productivity


First come training and maximised productivity by levels in continental Europe.
education policies, which
govern qualification levels.
Another important parameter Companies must
is flexibility on the goods
and labour markets. Barriers
make strategic
that limit access to certain
economic activities and factors
that impede recruitment and
professional mobility are
detrimental to productivity.
Lastly, innovation efforts

decisions in
accordance with
their activities and
play a key role, as is the case markets
today with information and
communication technologies Gilbert Cette,
(ICTs). All these factors are, of Associate Professor
of Economics at the
course, correlated. Training University of the
contributes to innovation. But Mediterranean and
what is the point of innovating Member of the French
in ICTs if the market is not Economic Analysis
open, as was the case with Council
telecommunications in several
countries for a long time? investing in training, relaxing But they are both small
regulations and promoting ICTs. countries specialising in high
Which countries are Europe’s It’s by capitalising on these key value-added production. By
best of breed in this respect? factors that Ireland has forged concentrating on highly capital-
Ireland quickly moved up to ahead of other countries such as intensive industries - finance in
the top three. Tax incentives for Greece and Portugal, which fall Luxembourg and forestry, oil

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and fisheries in Norway, they
have reached record-breaking
not lost for countries with
low productivity if they make >>
productivity levels. This highly the necessary efforts. By
Gilbert Cette is a member of
specific approach is difficult to concentrating on the right
export to larger countries with factors, the Czech Republic, the French Economic Analysis
bigger populations and, hence, Hungary and Slovenia have Council (a body reporting to
more diversified economic already overtaken Portugal. the French Prime Minister)
activities. Poland, Slovakia and the Baltic and associate professor of
states are right behind. If economics at the University
Why is France’s productivity productivity is improving more of the Mediterranean. A
higher than that of the United slowly in Romania and Bulgaria,
specialist in macroeconomics,
Kingdom, where flexibility is it’s because they are restrained
theoretically higher? by inflexible institutions. growth, productivity analysis,
One thing needs to be made production economics and
clear as regards the method used What importance must labour economics, he sits on the
for calculating productivity: companies place on productivity editorial committee of several
it only takes into account the before setting up in a new publications, including the
performance of employed people. country? Review of Income and Wealth
That explains France’s good Productivity cannot be
(UK) and the International
figures: with an employment separated from labour costs.
rate ten percentage points lower What is the point of doubling Productivity Monitor (Canada).
than that of the UK, France’s jobs productivity if the costs triple?
are concentrated on the most But cost is not the only factor. His works include numerous
productive people. Furthermore, You also have to consider books and articles:
with shorter working hours, institutional factors such as
drops in productivity due to the industrial property protection, “The Levers of French Growth” (2007 – in
French), a report by the French Economic
effects of fatigue are avoided. corruption, etc. Qualifications Analysis Council, co-author
and the quality of training must
“Growth and Productivity in Europe and
A somewhat disconcerting also be taken into account, as the United States” (2007 – in French),
paradox... must a country’s infrastructure. La Découverte, collection "Repères"
Companies are familiar with These are the factors that lie “Trends in ‘Structural’ Productivity Levels
these data, which illustrate the behind productivity, as though in the Major Industrialized Countries”
influence of economic policies it were a prism through which (2007) Economics Letters #95,
pp. 151-156, co-author
on productivity. A country we observe various qualitative
with a high employment rate aspects of performance. But “Opportunity Costs of Having a Child,
mobilises more of its available a company must also make Financial Constraints and Fertility”
(2007), Applied Economics Letters,
workforce, hence more less strategic decisions in accordance Vol. 14, Issue 4-6, May, pp. 239-244,
qualified people. Productivity with its field of activity and co-author
suffers as a result, and it is more markets.
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 EXPERT
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COST AND PRODUCTIVITY

Albert Martens
IKEA: productive
I
kea’s performance lies in the success
enjoyed by deploying the same offering
and management model across all the
continents, undergirded by the universal by being human
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 Costs and productivity are closely measured at Ikea
both at home and in the workplace rules out could ever doubt that! But the Swedish home furnish
neither monitoring nor optimising measures.
From cost prices to checkout queuing times, giant, which is not listed on the stock exchange, is m
from productivity to sales per employee
without forgetting cost per hour or staff costs, long-term investments in managerial quality, to the p
nothing escapes the company managers. But standing back from current productivity models. This
they keep an even closer eye on the quality
aspects of these quantifiable performance is reflected in the universal well-being values that the
indicators. represents to both its employees and customers.
“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 Every two years, co-workers are
together.” interviewed individually to rate Ikea as an
employer. Career advancement, corporate
Fostering productivity responsibility, management, everything is
So Ikea will be taking a close look at its evaluated. The results are consolidated at
staff’s working conditions. Confident that individual team level. A clear message is
its values are universal, it applies them revealed when these results are compared
in-house with as much assurance as it does with business performance: “Customer
on the market. An accurate impression of satisfaction is commensurate with co-worker
the workplace environment can be gained satisfaction.” Hence a major ambition for HR:
by simply taking a stroll through an Ikea a student employed part-time who stays only
store: an open organisation; direct, informal for a year is already seen as a failure for the
relations; virtually non-existent bureaucracy. management. Fortunately, co-workers are
Co-worker satisfaction and loyalty must allowed to make mistakes, as they are seen
be upheld in this area as well as all the as opportunities for improvements...
others. In a company where well-being is an “Everything is based on respect for people,”
integral part of its culture; nobody is afraid of stresses Albert Martens. “Everyone must be
measuring this factor. able to advance. So we ask our managers

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- nobody to be leaders first and foremost. All our The Swedish giant doesn’t cut corners, and
hings processes are transparent, from the definition continues to invest even when times are hard.
of objectives to assessment methods and For Ikea, the quest for productivity is based
making reward criteria.” on an exemplary integration of short and
long term goals, quantitative and qualitative
point of In time and space aspects, development of business and people.
s quality Some people will say that there is nothing It has to be said that the company is not
new about Ikea and that many companies under pressure from the stock market to
e brand – especially in the service sector – have deliver growth, and the HR managers feel
understood the productivity gains that can quite at home with that.


be made with an intelligent HR policy. But
the Ikea model goes much further and is
deployed within the mosaic of the
Our vocation is to different cultural environments
and regulations of each country
Ikea

improve people’s in which the firm operates – from


“ IKEA is specialized in functional home
Russia to Malaysia, Sweden to furnishing products. Since its creation in 1943
lives, so we start Japan and Saudi Arabia to China. in Sweden, the IKEA Group has grown into a
This also requires a certain major retail experience. With more than
with those of our amount of patience. 231 stores in 24 countries and over
co-workers Ikea is conquering the global
125,000 co-workers in 40 countries, the IKEA
market on an obvious fact - Group has annual sales worth more than
Albert Martens, people feel happiest at home. 19 billion euros. Today’s IKEA range consits
Director, in charge of HR of about 9,500 articles. The IKEA Group is a
And the company is so confident
Global Transformation
at IKEA of the values represented by its privately held company.
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
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COST AND PRODUCTIVITY
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.

What are the main things you Can we predict future changes Are hourly labour costs a good
see when you look at European in this difference between old and indicator of how attractive a country
hourly labour costs? new EU member states? is for a multinational company?
Hourly labour costs are much There’s no doubt that the new Not on their own. The factor
lower in the countries that have ones are catching up, at quite a that companies must consider is
joined the European Union since fast pace. This is demonstrated the unit labour cost, which is the
2004 than in the 15 states that by the level already reached in expenditure required to produce
were already members, to which some countries. It is reasonable the same output value in each
we can add Switzerland and to assume that the new EU country. So it takes into account
Norway. So there is still a gulf member states will have halved productivity. Sure, you can take


between the accession states and the difference with the EU-15

The new EU member



states will have halved
the difference with the
EU-15 states in ten
years’ time
Professor Filip Abraham,
Professor of International Economics
and European Integration,
Vice-Rector at the Catholic
University of Leuven (Belgium)
the “historic” member states
of the EU, although there are states in ten years’ time thanks a short cut and say that costs
variations. Hourly labour costs to their rapid economic growth. are lower in the new member
have already reached 50% to Investment from western states and that the EU-15 states
60% of the EU-15 average in the companies is generating high are more productive. But it’s
Czech Republic, Slovenia and demand for labour in the new the unit labour cost that tells
Hungary. This figure is around member states, pushing wages, us in what proportion. And we
30% in most of the other new hence labor costs, upwards. see that the difference between
member states; it is even lower old and new member states is
in Bulgaria and Romania. smaller with unit labour costs
than with hourly costs.

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So the new member states are
not that attractive after all?
What about countries with high
labour costs? >>
The advantages related to hourly At the top of the scale, where
Professor Filip Abraham is
labour costs alone must be put hourly labour costs are fairly
into perspective. Studies have similar, the ratio between Vice-Rector for Humanities
already shown that Poland the wage and non-wage and Social Sciences at the
and Hungary are no longer components varies. Wages are Catholic University of Leuven
competitive in some sectors. But high in Switzerland, Norway (Belgium), where he teaches
we also need to bear in mind that and Denmark, so welfare International Economics and
wage costs in these new member contributions are less of a European Integration. He is
states are increasing because burden. And yet these countries
also professor of International
their productivity is improving! benefit from excellent social
And that’s a good argument for services, which are funded Business in the Vlerick Leuven
setting up business there! In my through “general” taxes rather Gent Management School.
view, the main risk lies rather in than through payroll taxes. He is an external contributor
what I call the “benchmarking In other countries, including for the European Commission
effect”, when the employees of France, Belgium and Germany, and a consulting expert to
subsidiaries in low-cost countries welfare contributions - i.e. the multinational companies such
compare their wages with those non-wage component, are the
as Philips, Siemens, Hoechst and
of the parent company. Taken largest proportion of labour
to its extreme, that can result costs. IBM. Pr Abraham holds a Ph.D. in
in demands for readjustments Economics from the University of
that bear no relation to actual With such high labour costs, Michigan and is a member of the
productivity levels. That’s a will these countries manage to editorial board of the Journal of
risk that cannot be ignored; we keep productivity high enough to International Trade Law & Policy.
saw it recently in the strikes at stay competitive?
Renault’s subsidiary in Romania, They are staying cautious and
Dacia. In short, making labour keeping a tight rein on their He is the author of many articles
costs the sole motive for setting hourly labour costs. Some and publications, including:
up business in a foreign country countries have simply opted –
“The Rise of China: Prospects for
is not a wise calculation. The fully aware of the implications Regional Trade” (2005), Review of World
country must offer the company – to devote a large proportion Economics, vol 141, no 3, p 486-509,
other advantages such as to social welfare. And we are co-author
centres of expertise, suitable seeing that is not detrimental “Sectoral Employment Effects of Trade
infrastructure, potential for to their productivity – on the and Productivity in Europe” (2003),
Applied Economics, vol 35, p 223-238,
innovating, etc. contrary. So they are remaining co-author
competitive, as the unit labour
“Global and European Labor Costs”
What about differences between cost figures demonstrate here (2002), Tidjschrift voor Economie en
EU-15 member states? again. Management, vol XLVII no 3, p 373-398
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. EXPERT
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facts & figures

Hourly labour costs

26.83

5.49

30.21
4.68
31.8
Hourly labour
4.27
costs (€)
<5
5 - 10
6.28 10 - 20
27.44
24.89 20 - 25
30.56
27.5 25 - 30
7.14 > 30
32.39
5.15 Not available
Labour costs cover wage and salary
25.3 costs, more generally remunerations in
34.26 6.52 cash or in kind paid by an employer to an
28.2 employee as well as the employers’ social
12.01 2.82 contributions plus employment taxes.

21.39

1.71

16.15
12.13 13.37

9.51
13.13
Source: European Communities Eurostat 2008 – Hourly labour costs 2004, 2005, 2007

Did you know?


• Baltic countries showed the highest rises in labour • L abour productivity per person
costs in 2007: from 17.5% in Estonia to 33.3% (relative to constant 100 base for EU 27):
in Lithuania.
USA: 139.0 (1997), 140.5 (2008)
• Lowest increases were recorded EU 15: 114.7 (1997), 109.7 (2008)
in Germany (1.6%) and Sweden (2.2%).

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facts & figures

Labour productivity per person employed: variation 1997-2008


EU 15 countries + Norway New EU members

Relative to constant 100 base for EU 27


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

Full time employees contractual wages

Contractual minimum monthly wages (€)


Contractual minimum monthly wages (€)

Proportion of full-time employees on minimum wages


Proportion of full-time employees on minimum wages

Source: Based on European Communities Eurostat 2008

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