Western Europe has the world’s most expensive labour markets, with the cost of hiring staff highest in France and Italy reports Verisk Maplecroft. By comparison, businesses with supply chains and operations in Myanmar, Bangladesh and Cambodia benefit from the world’s lowest labour costs.
However, the risk analytics company warns that the attractions of the lowest-cost labour markets may be offset by the risks posed by poor working conditions and high levels of child labour and trafficking.
‘Labour Costs Index’
(LCI) measures a combination of wages, employment regulations, social security contributions and labour productivity to enable companies to identify and compare the cost- competitiveness of workforces in 172 countries.
Western Europe makes up the majority of the 27 countries identified as ‘extreme risk’ in the index. While the region is relatively productive in global terms, high average wages, expensive severance mechanisms and high employer social security contributions combine to reduce its attractiveness as a location to employ staff. The 10 most costly countries are: Italy (1), France (2), Belgium (3), Spain (4), Finland (5), Slovenia (6), Luxembourg (7), Austria (8), Iceland (9) and Greece (10).
While the European Commission (EC) has made labour market reforms a central plank of its competitiveness and employment agenda, rigid laws designed to provide a large safety net for employees in the two highest risk countries in the LCI, Italy and France, have made them the world’s most costly locations to hire new workers.
As a result unemployment rates, especially among young people, are very high in these countries. In Italy, youth unemployment reached a record high of 44.2% in August 2014, while in France the figure is 26%. By comparison, the average 2013 youth unemployment rate in Organisation for Economic Cooperation and Development (OECD) countries was 17.5%.
“The cost of employing staff is a key consideration for companies when they consider where to invest,” said Charles van Caloen, a senior analyst at Verisk Maplecroft. “Countries that have high labour costs relative to productivity levels risk deterring mobile international capital that can bring jobs and growth in its wake.”
China, ranked 64th in the LCI, has seen costs in the labour market rise rapidly in line with the country’s phenomenal economic progress. By contrast, key sourcing destinations that are increasingly replacing Chinese manufacturers in global supply chains perform very well in the index with Myanmar (171), Bangladesh (170) and Cambodia (169) all ranked among the five lowest-risk economies.
While the work undertaken in these countries is still comparatively low value, the average wage is less than US$100 per month, compared to US$450 in China, according to the International Labour Organisation (ILO). Furthermore, Bangladesh and Myanmar do not require employers to make social security contributions, while China requires a social security contribution of 20%. Over time, this cost-competitiveness will likely attract investment that will drive development and increase productivity and wages, as with China in recent years.
However, Verisk Maplecroft warns companies that they need to be alert to other risks associated with operating in or sourcing from low-cost locations. While Myanmar, Bangladesh and Cambodia present low labour costs, each is rated as ‘extreme risk’ by for health and safety, working conditions, child labour and human trafficking.
Countries with low levels of socioeconomic development and inadequate environmental protections present a host of additional risks and indirect costs to business – including brand damage, investor alienation, and potential lawsuits. Additionally, extremely low wages and poor working conditions can contribute to industrial and civil unrest – particularly if workers perceive that they are not benefitting from foreign investment or rapid economic growth.
“The true cost of business in the emerging economies is more than the direct expenses associated with the labour force,” adds van Caloen. “It is essential for companies to understand and price in risks, such as strikes, disruptions and poor worker health, when making market entry or strategic sourcing decisions.”
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