Labour costs are defined by Eurostat, the European Community statistical office, as ‘core expenditure borne by employers for the purpose of employing staff’. They include employee compensation, with wages and salaries in cash and in kind, employers’ social security contributions and employment taxes regarded as labour costs minus any subsidies received, but not vocational training costs or other expenditure such as recruitment costs and spending on working clothes (by contrast with multiannual and annual labour cost data). These labour cost components and their elements are defined in Commission Regulation (EC) No 1726/1999 of 27 July 1999 implementing Council Regulation (EC) No 530/1999 concerning structural statistics on earnings and labour costs as regards the definition and transmission of information on labour costs.
The cost of labour includes both direct and indirect labour costs. Hourly direct labour costs may be defined as direct hourly pay: basic pay plus overtime, shift and other regularly paid premiums. In addition, there may be additional elements of direct labour costs such as holiday pay, Christmas bonus payments and irregular cash payments and bonuses. Indirect costs of labour include employer contributions to social security funds, sick pay, other social payments and vocational training costs.
The creation of the single European market exposes enterprises to competition with enterprises in other Member States. This means that pressure will be exerted on enterprises with high direct wage costs to secure the productivity that will enable them to compete with enterprises elsewhere in the Community with lower wage costs. The European Commission, while suggesting that harmonisation of indirect wage costs (such as dismissal protection, social security contributions and other forms of taxation) should be considered, also recognised that harmonisation of direct costs (rules governing wages and salaries) was unnecessary because ‘differences in productivity levels attenuate these differences in unit labour costs to a considerable degree’ (COM (90) 228). Indeed, this aspect of competition, aimed at rewarding productivity, was one of the objectives of the Single European Market programme.
National systems of labour law and social protection impose indirect labour costs on enterprises, such as the costs of compliance with labour standards and the costs of contributing to social protection schemes. Lower labour and social standards in some Member States may entail lower indirect labour costs for enterprises in those Member States. The result is to give enterprises in those countries with lower indirect labour costs a potential competitive advantage compared with enterprises in Member States with higher labour and social standards. This advantage may not be realised as enterprises in countries with higher labour and social standards may have access to better transport infrastructures or a more highly trained and skilled workforce and so on, which more than offsets higher indirect labour costs.
Some argue that, as a result of social dumping, enterprises may be encouraged to locate new investments, or even locate existing operations, to countries with lower direct or indirect labour costs, which have been obtained by holding down labour standards. This might push other Member States to reduce their labour and social standards in order to ease the burden of high indirect wage costs on enterprises. However, with the exception of a few well publicised cases, there is little convincing evidence of widespread social dumping inside the EU.