Paying people in the EC.

• Author: McKay, Jim
• Position: Employment costs in Europe - The European Community

Independent pension plans, no-incentive stock offerings, hands-on works councils . . . the many faces of employment in the European Community. How does it add up for EC and North American companies?

With the North American Free Trade Agreement on the horizon, many people are focusing on employment costs, debating whether American jobs will be lost as companies try to boost profitability by moving tasks to Mexico, where employment costs are lower. Some executives say it's the only way to cut expenses and remain competitive. But what about the many U.S. companies that have European subsidiaries? How do employment costs compare there ? Are the issues the same?

January 1, 1993, marked the beginning of free trade within Europe's "single market," which means that a company operating in one European Community country can trade throughout the EC without meeting any other country's regulations. However, it doesn't mean the 12 EC countries are similar to 12 U.S. states.

Though EC law does in many instances overrule national laws, each EC country maintains its own taxation and social security systems and its own occupational practices. So, while a financial comparison of the cost of locating in the United States versus locating in Mexico is relatively straightforward, how do you cost out where to locate in Europe? The single market sounds fine in theory, but how do you make sense of it all?

The social costs of employment vary widely in the EC. We assume social costs -- those beyond an employee's take-home pay -- are the sum of the following:

* Social security contributions for both the employee and the employer.

* Income tax paid by the employee, since this has a direct bearing on the ultimate salary paid.

* Mandatory supplementary benefit plan contributions from both the employee and the employer.

* Private pension plan contributions by both the employee and the employer. Though these are voluntary plans, competitive pressures force employers entering the market to follow local practice. To ignore these would underestimate the overall social cost. (In the United States, this would include health care plans.)

For every $100 of take-home pay to a U.S. employee earning average compensation, the additional cost is $65, for a total of $165. But, in Italy, companies add 106 lira to 100 lira of take-home pay, more than doubling the total employment cost.

Of course, you must factor these social costs into your compensation calculations before you can determine the overall cost of an employee. A bigger question, however, is the difference in currency purchasing power.

As you can see, Belgium, France, Germany, Italy and the Netherlands top the league in cost, while the United States is in the lower half. Of course, no company would locate in a particular country merely because of employment costs. Infrastructure, communications, the local market...