Survey argues that UK employees are better off than their European neighbours

Falling unemployment, low inflation and stable earnings have led some to suggest that the UK's labour market reforms of the 1980s are finally delivering results. This view could be given further support by recent research that indicates that UK employees are now among the leaders in Europe in terms of standard of living. However, this may provide too simplistic a view of the situation.

A combination of falling unemployment and soaring corporate profit has still not generated demands from UK workers for a round of substantial pay increases. The annual rate of growth of average earnings fell slightly from 4.5% in April 1997 to 4.25% in both May and June, according to the latest Labour Market Briefing (August 1997) from the Trades Union Congress. One reason why average pay may have risen so slowly is that the recent surge in job creation has come mainly in lower-paid positions in shops, hotels and restaurants. Overall figures have also been depressed by continued tight control of public sector pay, which accounts for about 20% of the earnings index. Although commentators note that there have been attitudinal changes - in that managers, union leaders and shopfloor workers generally accept that companies can only fund pay rises they can afford - this is combined with the fact that increased flexibility in the job and pay markets is permitting greater divergence both within and between companies in terms of pay rates. This permits pay negotiators to take more account of the financial performance of individual units. There is also an element of the "fear factor", in that although unemployment figures are falling the proportion of households which experience long-term unemployment is growing. Only skill shortages in certain industries have led to an upward pressure on wages, but having said this, it is generally agreed by employers and trade unionists alike that there is likely to be little change in the general climate of pay and inflation.

Cross-Europe pay comparisons

Some might ask why there should be any such change in the current climate. Recent research published in September 1997 by the consultants, Sedgwick Noble Lowndes, argues that the average employee has a better standard of living in the UK than in most other countries of the European Union. The research, published in the company's latest annual Guide to employee benefits and labour law in Europe, compares average earnings across Europe, taking account of deductions for income tax and contributions to pensions and welfare benefits. Table 1 below shows that, after adjustments for national differences in pricing and purchasing parity, the average UK employee receives the equivalent of GBP 6.80 an hour compared, for example, with GBP 6.50 in Germany, GBP 6.30 in France and GBP 5.70 in Sweden. According to the table, only those employees in Luxembourg, Austria and Ireland receive more in net pay than the British, corresponding to GBP 7.40, GBP 7.10, and GBP 7.00 an hour respectively.

Table 1. Hourly net and gross pay, 1997

Hourly gross pay, adjusted* Hourly net** take-home pay, adjusted*
Belgium GBP 9.40 Luxembourg GBP 7.40
Denmark GBP 9.10 Austria GBP 7.10
Germany GBP 8.80 Ireland GBP 7.00
Luxembourg GBP 8.80 UK GBP 6.80
Austria GBP 8.60 Belgium GBP 6.80
Ireland GBP 8.30 Spain GBP 6.80
UK GBP 8.30 Germany GBP 6.50
Netherlands GBP 8.00 France GBP 6.30
Sweden GBP 7.80 Denmark GBP 6.20
Spain GBP 7.70 Italy GBP 6.00
France GBP 7.70 Netherlands GBP 5.80
Finland GBP 7.40 Sweden GBP 5.70
Italy GBP 7.30 Finland GBP 5.40
Greece GBP 4.90 Greece GBP 4.30
Portugal GBP 3.50 Portugal GBP 3.20
. . . .
Japan GBP 9.80 Japan GBP 8.70
USA GBP 8.70 USA GBP 6.90

Note: All figures are for cash earnings.

* Using OECD 1996 purchasing parities.

** After deducting tax, social security contributions and typical contributions to voluntary supplementary benefit plans.

Source: Guide to employee benefits and labour law in Europe 1997-8, Sedgwick Noble Lowndes.

As mentioned above, skill shortages have led to wage rises in particular industries in the UK. In the building industry alone, shortages among bricklayers and carpenters has prompted wages to rise by more than a sixth in the south-east of England during the past 12 months. Exacerbating the problem is the fact that not only English, but also UK-based Irish building workers are said to be making their way to Ireland. According to the Sedgwick Noble Lowndes figures, the Irish labour force earns the equivalent of GBP 0.20 more an hour than the comparable level on what has traditionally been regarded as the more affluent side of the Irish Sea. It is perhaps little wonder that British construction groups are complaining about shortages as Irish workers return to enjoy the better pickings at home.

Even so, David Formosa, international research manager at Sedgwick Noble Lowndes stated that: "For many years, the general impression has been that UK employees enjoy a lower standard of living than in other parts of central and Northern Europe. This is certainly not borne out by the figures today ... Other countries may offer higher gross salaries but this does not mean that that their citizens are always better off. In the UK, we pay a comparatively smaller amount in taxes and welfare contributions, which compensates for the generally lower level of earnings."

Table 2 below shows that for the average employee, deductions from gross earnings stand at 25% in the UK. This rate compares favourably with countries like Germany and Denmark, where deductions of 33% and 38% respectively reduce the higher gross salaries of their employees to below the UK level in net terms. However, UK employers have the lowest mandatory contribution levels after Denmark, and the UK also comes in the bottom half of the "league table" when it comes to labour costs.

On average, European employers pay mandatory and voluntary benefit contributions equal to 35% of what they pay in cash to their employees. This compares with 23% in the USA and 24% in Japan, but in the UK the rate is only 20%.

Table 2. Deductions from pay and employers' contributions, 1997

Tax and other deductions from employees' pay (% of gross) Employers' mandatory contributions (% of employees' gross pay)
Denmark 38 Italy 50
Finland 34 France 47
Belgium 34 Sweden 40
Germany 33 Belgium 36
Sweden 33 Greece 35
Netherlands 31 Spain 33
Austria 25 Portugal 31
Italy 25 Austria 26
France 25 Finland 25
UK 25 Germany 23
Ireland 24 Luxembourg 13
Luxembourg 23 Netherlands 13
Spain 20 Ireland 12
Greece 20 UK 8
Portugal 18 Denmark 4

Source: Guide to employee benefits and labour law in Europe 1997-8, Sedgwick Noble Lowndes.

Commentary

Although net hourly take-home pay may be among the highest in Europe, labour costs, gross pay and contributions to welfare and tax in the UK are low. This raises some awkward questions regarding the standard of living, when external economic benefits as an whole are considered. First, the UK's lower levels of labour costs are equally matched by lower levels of productivity. Second, it seems that net pay is high only because the UK has much lower contributions to welfare and tax. This in turn means that it has lower levels of social services, both in comparison with the past and with some other European countries. Third, the fact that the gap between those at the top of the income ladder and those at the bottom continues to widen leaves some embarrassing questions to be faced about the absence of an increased standard of living for all those in the UK. When these factors are taken into account, there is likely to be a very different picture concerning the UK's position in the standard-of-living league table. (MW Gilman, IRRU)

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