Labour costs analysed

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Labour costs in Poland account for a relatively small share of the overall costs of production, with the share of net wages being especially low. This results from the comparatively high tax burden on labour. The actual level of labour costs depends, first of all, on the branch of the economy, followed by the size of the enterprises involved and their ownership status. The highest wages in Poland, and consequently also the highest labour costs, are still found in mining, despite recent restructuring. Poland has much lower labour costs than the EU Member States or the USA, but higher than those in some neighbouring central European countries.

Labour costs are currently an important issue in Poland, not least in terms of the country's attractiveness as a destination for foreign investment. This article examines the share, level and structure of labour costs.

Proportion of labour-related costs in GDP

A key issue with regard to labour costs is their share in a country’s Gross Domestic Product (GDP). This proportion has an impact on the overall competitiveness of the economy, especially in the case of relatively undeveloped countries which are in need of foreign investment. According to research conducted in the late 1990s, the share of labour costs in Poland’s GDP stood at 44.2%, less than in most European Union countries and in the USA (see Koszty pracy w Polsce, Urszula Szanderska and Jacek Liwiński, Centre for Social and Economic Research [Centrum Analiz Społeczno-Ekonomicznych, CASE] Warsaw, 1999). Analysis conducted over several years has revealed that, while labour costs in Poland may account for a lower share of GDP than in many other countries, this proportion is still roughly similar, particularly in relation to the less developed Member States of the EU. Comparative studies, meanwhile, have indicated that most European countries have been experiencing a gradual reduction of the share of labour costs in GDP while that in Poland (and also in the Czech Republic) has been growing.

The relative increase of labour costs observed in Poland is the result of payroll increases which outpace growth in productivity. Since 1989 - the year in which Poland’s economic and political reforms were launched - two periods can be distinguished in this regard. The first, lasting until approximately 1992, was marked by the very stringent payroll and taxation policies followed by the Prime Minister at the time, Leszek Balcerowicz. In his effort to curb inflation, and also to achieve rapid privatisation of state-owned enterprises, Mr Balcerowicz created a situation whereby increases in wages in the public sector were drastically reduced. During the first years of the country’s reforms, this led to a significant reduction of labour costs across the entire national economy. At the same time, the restrictive tax legislation in force for state-owned enterprises (these rules did not apply to the private sector) encouraged privatisation by an assortment of means as well as the proliferation of 'mixed' corporate entities with a combined state- and privately-owned shareholding structure (PL0209103F). These processes, combined with the subsequent creation of a uniform tax burden for both the private and the public sector, led in the second period to a reversal of the trend, and remuneration began to grow faster than productivity. The apogee in this respect came in 1994, which brought a 6.6% drop in productivity coupled with a wage increase of 5.8% (at producers’, rather than commercial, prices). In subsequent years, the gap between productivity and salaries was reduced somewhat, but the increase in wages continued to be at least a little faster than that of productivity.

Level of labour costs

According to Polish Official Statistics (Główny Urząd Statystyczny, GUS), the average labour cost in 2000 was PLN 2,623 per month, accounting for 25.9% of the overall operating costs of employers (see Koszty pracy w gospodarce narodowej w 2000 roku). For entities financed out of the state budget (schools, hospitals, administrative entities etc), this proportion of total operating costs was 62.2%, and for the remaining employers 22.9%. Comparative studies indicate that, overall, labour costs in Poland are increasing, and also that they differ significantly depending on the sector, ownership structure, and size of the employer. Zofia Jacukowicz of the Institute of Labour and Social Affairs (Instytut Pracy i Spraw Socjalnych, IPiSS) has assembled an interesting comparison of GUS labour costs data for 1996 and 2000, set out in the table below.

Monthly labour costs by sector of activity, 1996 and 2000
Sector Proportion of costs in sector to average costs for entire economy Costs in 2000 compared with costs in 1996 (%)
1996 (average: PLN 1,493) 2000 (average: PLN 2,623)
Average cost of labour per month 100.0 100.0 175.7
Agriculture, hunting and forest husbandry 92.4 88.9 168.5
Fisheries 114.5 95.0 145.7
Mining and mineral extraction 169.3 156.5 162.4
Industry (manufacturing) 91.5 91.5 175.8
Generation and supply of power, gas, and water 138.6 128.2 162.6
Construction 91.8 92.3 176.6
Trade and repairs 91.3 94.7 182.0
Hotels and restaurants 67.6 70.1 182.3
Transport, warehousing, and communications 101.5 110.6 191.4
Financial intermediation 152.4 149.6 176.1
Real estate and company services 107.4 110.4 180.5
Public administration 128.3 120.4 164.8
Education 86.8 96.4 195.1
Health care and social assistance 87.3 72.8 146.5
Other activities 89.6 98.6 193.3

Source: GUS data, calculations by Zofia Jacukowicz ('Polityka Społeczna' no 5-6, 2002) and own calculations.

According to this analysis, the leading position as regards remuneration – and, consequently, also labour costs – in Poland goes to mining and mineral extraction (most particularly to hard-coal mining). In spite of economic restructuring and the significant reduction of employment in the mining industry (down from approximately 450,000 to 140,000 people over 10 years), this tradition remains in place, although there has been a marked downward tendency affecting costs in this area – in 1996, the cost of labour in the mining industry exceeded the average by almost 70%, but by 2000 it had fallen to 56.5% above the average. It should also be borne in mind that the cost of labour in mining has undergone a significant decrease since the socialist period.

The second-highest labour costs occur in financial intermediation, followed by the energy industry and by the public administration sectors. Analysts have highlighted the considerable difference between the wages prevailing in education and in healthcare. In 1996, earnings in these two sectors were similar, standing at some 86%-87% of average pay; four years later, however, a 25-point difference – to the disadvantage of the healthcare sector – had emerged. Apart from this shift in the relationship between education and healthcare, there have also been changes within each of these sectors. In the field of education, higher education lost ground in terms of salaries with regard to the whole sector; in healthcare, basic healthcare became less costly while the cost of social care increased.

The analyses by Zofia Jacukowicz indicate that a slow change is taking place as regards the relationship between labour costs in the public and the private sectors. As has been repeatedly pointed out in many studies, the remuneration as well as the labour costs in the public sector are higher than in the private sector. In 1996, the cost of labour in the private sector amounted to 86.7% of that in the public sector; in 2000, this proportion stood at 90.8%. As Jacukowicz states: 'it can be posited that privatisation leads to a reduction of labour costs, although there is plenty of information suggesting that some of the private employers are not revealing them in full. To accept this information as verified, one can go on to posit that the cost of labour in both sectors is, in the truth of the matter, equal, only that the official figure given for private industry is artificially low.' ('Koszty pracy w Polsce', Polityka Społeczna no 5-6, 2002).

Significant differences in labour costs also exist between business operations of different sizes. According to GUS, medium-sized industrial enterprises pay out wages which correspond to 65.1% of those in large enterprises; for the mining and mineral extraction sector, this proportion is 65.7%, and for the energy sector 69.1%.

Structure of labour costs

A 2001 publication by IPiSS (Labour costs and the labour market, Warsaw 2001) points to three key characteristics of the structure of labour costs and wages in Poland:

  • a high proportion of external costs is imposed by the state. These include, first and foremost, the various retirement and disability insurance contributions, health insurance contributions, and benefits for employees relating to employment protection, social benefits, and such. According to GUS, the share of remuneration to employees in labour costs was 59% in 1996 and 61% in 2000;
  • some components of remuneration are not correlated to the outcomes of work but, rather, are of a fixed nature. This is the result of statutory requirements as well as of the survival of traditional remuneration systems first put in place during socialist times. A significant item within these old remuneration schemes is the 'bonus for years worked'. Systems of this sort linger most in state-owned enterprises as well as in some former state enterprises which have been privatised. When, for instance, large state companies were being sold to foreign investors, social pacts were executed between the trade unions and the new owners, and the typical pact guaranteed the retention of the bonus for years served; and
  • some of the Polish standards which result in increases in the cost of labour are more strict than those in force within the EU. This is the case particularly as regards overtime payments, severance payments (these depend on the overall length of the given employee’s career, rather than service with the particular employer), and paying wages for the first month of sickness absence. While the 2002 amendments to Poland’s Labour Code (PL0209107F) have somewhat reduced this burden on employers, it continues to be quite considerable.

Commentary

The relative increase of labour costs in Poland, which is somewhat greater than the increase in productivity of work, must be viewed in the context of the situation prevailing in the European Union countries. Comparative analysis indicates that the cost of employing an employee in Poland is between five and nine times lower than in the EU or the USA; the productivity of Polish workers, meanwhile, is between five and seven times lower. This enables the Polish labour market to retain its attractiveness, especially as concerns investors implementing modern, highly-efficient technologies. A cause for disquiet, meanwhile, lies in the fact that the cost of labour in Poland is relatively higher than in the neighbouring countries of central Europe, with the higher costs of labour causing Poland to lose some of its appeal for foreign investors.

The present situation in Poland poses a serious challenge to the government. The relatively high costs of labour in Poland are, to a large degree, the result of high labour taxes imposed by the state; the high taxes, in turn, are associated with the large budget deficit, the need to finance the public sector and the public services, and the considerable drain on the state budget associated with social insurance benefits (notably for the 3.2 million unemployed people - PL0210110F). The relatively high taxation of labour and the high costs of labour which this entails not only make Poland a less attractive destination for foreign investment, it also causes many small and medium-sized Polish companies to seek refuge in the 'grey' area of the economy, reporting salaries in their tax returns at less than their actual level or simply hiring illegally (PL0206102F). (Juliusz Gardawski, Institute of Public Affairs (Instytut Spraw Publicznych, ISP) and Warsaw School of Economics (Szkoła Główna Handlowa, SGH)).

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