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
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.
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
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

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
“
maximised productivity by levels in continental Europe.
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
investing in training, relaxing But they are both small
regulations and promoting ICTs. countries specialising in high
It’s by capitalising on these key value-added production. By
factors that Ireland has forged concentrating on highly capital-
ahead of other countries such as intensive industries - finance in
Greece and Portugal, which fall Luxembourg and forestry, oil

2
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.
3
>>
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
EXPERT
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

4
 - 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
5

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
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.
6
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
“
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)
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.
 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.
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.
7
>>
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
EXPERT

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%).

8

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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