Labour cost components
As far as employees are concerned, the compensation received for their work, more commonly called wages or earnings, generally represents their main source of income and therefore has a major impact on their ability to spend and/or save. Whereas gross wages/earnings include the social contributions payable by the employee, net earnings are calculated after deduction of these contributions and any amounts which are due to government, such as income taxes. As the amount of taxes generally depends on the situation of the household in terms of income and composition, net earnings are calculated for several typical household situations.
The Diagram 1 summarises the relation between net earnings, gross earnings/wages and labour costs.
Diagram 1: Labour cost components
The average hourly labour cost in 2021 was estimated at €29.1 in the EU and at €32.8 in the euro area. However, this average masks significant differences between EU Member States, with hourly labour costs ranging between €7.0 in Bulgaria and €46.9 in Denmark (see Figure1); the average was higher still (€51.1) in Norway.
Figure 1: Estimated hourly labour costs, 2021 (€)
Source: Eurostat (lc_lci_lev)
Labour costs consist of costs for wages and salaries plus non-wage costs such as employers’ social contributions. In 2021, the share of non-wage costs in the total labour costs, for the whole economy, was 24.6% in the EU, while it was 25.1% in the euro area. The share of non-wage costs also varied substantially across EU Member States: the highest shares of non-wage costs were recorded in Sweden (32.0%), France (31.9%) and Italy (28.3%), while the lowest shares were recorded for Lithuania (3.7%), Romania (4.9%) and Ireland (8.7%).
Gross earnings are the largest part of labour costs. In 2018, the highest median gross hourly earnings in euro were recorded in Denmark (€27.2), Luxembourg (€19.6) and Sweden (€18.2), By contrast, the lowest median gross hourly earnings in euro were registered in Hungary (€4.4), Romania (€3.7) and Bulgaria (€2.4). In other words, across EU Member States, the highest national median gross hourly earnings were 11 times as high as the lowest when expressed in euros; when adjusted for price levels (by converting to purchasing power standards (PPS)) the highest average was four times as high as the lowest average, with Denmark and Bulgaria again representing the extremes at either end of the range.
Figure 2: Median gross hourly earnings, all employees
(excluding apprentices), 2018
Source: Eurostat (earn_ses_pub2s)
Low-wage earners are defined as employees who earn two thirds or less of national median gross hourly earnings. In 2018, 15.3% of the employees were low-wage earners in the EU compared to 16.4% in 2014. In 2018, the proportion of low-wage earners was 15.1% in the euro area compared to 15.9% in 2014. This proportion varied significantly between EU Member States: in 2018, the highest shares were observed in Latvia (23.5%), Lithuania (22.3%) and Estonia (22.0%). By contrast, less than 10% of employees were low wage earners in Denmark (8.7%), France (8.6%), Italy (8.5%), Finland (5.0%), Portugal (4.0%) and Sweden (3.6%).
Figure 3: Low-wage earners — employees
(excluding apprentices) earning two thirds or less of the median gross hourly earnings, 2018
(% of employees)
Source: Eurostat (earn_ses_pub1s)
Gender pay gap
The unadjusted gender pay gap is an important indicator to measure differences between the average earnings of men and women in the EU. In 2020, in the EU as a whole, women were paid, on average, 13.0% less than men, while the difference was 14.1% for the euro area. The biggest gender pay gaps were identified in Latvia (22.3%), Estonia (21.1%), Austria (18.9%) and Germany (18.3%). The smallest differences in average pay between the sexes were found in Slovenia (3.1%), Romania (2.4%) and Luxembourg (0.7%) — see Figure4.
Figure 4: Unadjusted gender pay gap, 2020
(difference between average gross hourly earnings of male and female employees, as% of male gross earnings)
Source: Eurostat (earn_gr_gpgr2)
Various issues contribute to these gender pay gaps, such as: differences in labour force participation rates, differences in the occupations and activities that tend to be male- or female-dominated, differences in the extent to which men and women work on a part-time basis, as well as the attitudes of personnel departments within private and public bodies towards career development and unpaid and/or maternity/parental leave. Some underlying factors that may, at least in part, explain gender pay gaps include sectoral and occupational segregation, education and training, awareness and transparency, as well as direct discrimination. Gender pay gaps also reflect other inequalities, in particular, women’s often disproportionate share of family responsibilities and associated difficulties of reconciling work with private life. Many women work part-time or under atypical contracts: although this permits them to remain in the labour market while managing family responsibilities, it can have a negative impact on their pay, career development, promotion prospects and pensions.
Net earnings and tax burden
All the data are based on a widely acknowledged model developed by the OECD, where figures are obtained from national sources (for further details on the model consult the information on the OECD - Benefits and wages website).
Information on net earnings complements gross earnings data with respect to disposable earnings, in other words after the deduction of income taxes and employee social security contributions from the gross amounts and the addition of family allowances (cash transfers paid in respect of dependent children), in the case of households with children.
In 2021, the net earnings of a single person earning 100% of the average earnings of a worker in the business economy, without children, ranged from €6952 in Bulgaria to €45787 in Luxembourg. The same two EU Member States recorded the lowest (€7965) and the highest (€61515) average net earnings, respectively, for a married couple with a single earner and two children (see Figure5).
Figure 5: Annual net earnings, 2021
Source: Eurostat (earn_nt_net)
In the case when both partners of a married couple work (both earning an average worker’s earnings), Luxembourg recorded the highest annual net earnings, both when the couple had two children (€101065 ) and when the couple had no children (€93451). Bulgaria recorded the lowest net earnings when the couple had two children (€14825) and slightly less (€13904 ) when the couple had no children.
Tax rate indicators (tax wedge on labour costs, unemployment trap and low wage trap) aim to monitor work attractiveness. Figure6 presents them for a low wage earner who earns two thirds (67%, to be exact) of the average earnings of a worker in the business economy (NACE Rev.2, Sections B to N) and who is a single person without children.
The first indicator, tax wedge on labour costs, measures the burden of tax and social security contributions relative to labour cost. It is defined as income tax on gross wage earnings plus employee and employer social security contributions, expressed as a percentage of total labour costs. This tax wedge for the EU was 39.2% (40.0% for the euro area) in 2021. The highest tax wedges on labour costs of low-wage earners in 2021 were recorded in Belgium (46.2%), Germany (44.2%), Austria (43.3%) and Hungary (43.2%) and the lowest ones in Malta (25.2%), Ireland (25.0%) and Cyprus (18.1%).
Figure 6: Tax rate indicators on low wage earners - single person without children, 2021
Source: Eurostat (earn_nt_taxwedge), (earn_nt_unemtrp) and (earn_nt_lowwtrp)
The second indicator, unemployment trap, measures the proportion (as a percentage) in the increase of gross earnings that is ‘taxed away’ by higher tax and employee social security contributions and the withdrawal of unemployment and other benefits when an unemployed person moves into employment. In 2021, the unemployment trap stood at 74.2% in the EU (75.8% for the euro area). The highest rates were recorded in Lithuania (105.8%), Luxembourg (91.7%) and Belgium (91.2%) and the lowest ones in Poland (59.6%), Romania (54.9%), Greece (54.5%) and Malta (51.8%).
The third indicator, low wage trap, measures the proportion (as a percentage) in the increase of gross earnings that is ‘taxed away’ through the combined effects of income taxes, employee social security contributions, and any withdrawal of benefits when gross earnings increase from 33% to 67% of the average earnings of a worker. The low wage trap was recorded at 38.4% in the EU in 2021 (40.4% for the euro area), with the highest rates observed in Belgium (62.2%), France (49.0%), Denmark (47.4%) and Luxembourg (46.7%) and the lowest ones in Bulgaria (22.4%), Czechia (21.7%), Estonia (21.1%), Greece (19.1%), and Cyprus (11.0%).
Source data for tables and graphs
- Wages and labour costs: tables and figures
Labour costs encompass employee compensation (including wages, salaries in cash and in kind, employers’ social security contributions), vocational training costs, and other expenditure (such as recruitment costs, expenditure on work clothes, and employment taxes regarded as labour costs minus any subsidies received). These labour cost components and their elements are defined in Regulation 1737/2005 of 21October 2005.
Labour cost statistics constitute a hierarchical system of multi-annual, annual and quarterly statistics, designed to provide a comprehensive and detailed picture of the level as well as the structure and short-term development of labour costs in the different sectors of economic activity in the EU Member States and some non-member countries. All statistics are based on a harmonised definition of labour costs.The labour cost levels are based on the latest labour cost survey (currently 2016) and an extrapolation based on the annual labour cost index (calculated based on the quarterly data). The data is available for all NACE Rev.2 sections except ‘A - Agriculture, forestry and fishing’, ‘O - Public administration and defence; compulsory social security’, ‘ T - Activities of households as employers; undifferentiated goods - and services - producing activities of households for own use’ and ‘U - Activities of extraterritorial organisations and bodies’.
The labour cost survey is a four-yearly survey that collects levels of labour costs at very detailed breakdowns. For the extrapolation with the labour cost index, data are only used at an aggregated level. The data is available for all NACE Rev.2 sections except ‘A - Agriculture, forestry and fishing’, ‘O - Public administration and defence; compulsory social security’, ‘ T - Activities of households as employers; undifferentiated goods - and services - producing activities of households for own use’ and ‘U - Activities of extraterritorial organisations and bodies’. The data for NACE Rev.2 ‘O - Public administration and defence; compulsory social security’ is collected voluntarily.
The quarterly labour cost index (a Euroindicator) measures the cost pressure arising from the labour production factor. The data covered in the labour cost index collection relate to total average hourly labour costs and the two main labour cost components: wages and salaries and non-wage component (composed of employers’ social security contributions plus taxes paid minus subsidies received by the employer). The data is available for European aggregates (EU and euro area), EU Member States as well as EFTA countries (Iceland and Norway). Covered are all NACE Rev.2 sections except ‘A - Agriculture, forestry and fishing’, ‘ T - Activities of households as employers; undifferentiated goods - and services - producing activities of households for own use’ and ‘U - Activities of extraterritorial organisations and bodies’.The data is available as nonadjusted, working day as well as seasonally adjusted.
The main definitions for earnings are provided in Regulation 1738/2005 of 21October 2005. Data come from the four-yearly structure of earnings survey (SES) whose latest vintage dates from October 2014. Gross earnings cover monetary remuneration paid directly by the employer, before tax deductions and social security contributions payable by wage earners and retained by the employer. All bonuses, regardless of whether or not they are regularly paid (such as 13th or 14th month pay, holiday bonuses, profit-sharing, allowances for leave not taken, occasional commissions, and so on) are included.
Data on median earnings are based on gross hourly earnings of all employees (full-time and part-time, but excluding apprentices) working in enterprises with 10 or more employees and in all sectors of the economy except agriculture, fishing, public administration, private households and extra-territorial organisations. Median earnings are calculated such that half of the population earns less than the median and the other half earns more.
Gender pay gap
The gender pay gap, in its unadjusted form, is defined as the difference between average gross hourly earnings of male paid employees and female paid employees, expressed as a percentage of average gross hourly earnings of male paid employees. The methodology for the compilation of this indicator is benchmarked on data collected from the structure of earnings survey (SES), which is revised every four years when fresh data from the structure of earnings survey become available.
According to the methodology used, the indicator concerning the unadjusted gender pay gap covers all employees (there are no restrictions for age and hours worked) of enterprises (with at least 10 employees) within industry, construction and services (as covered by NACE Rev.2 Sections B to S excluding O). Some countries also provide information for NACE Rev.2 Section O (public administration and defence; compulsory social security) although this is not obligatory. Information is also available with an analysis between the public and private sectors, by working time (full-time or part-time) and based on the age of employees.
Net earnings and tax burden
Net earnings are derived from gross earnings and represent the part of remuneration that employees can actually keep to spend or save. Compared with gross earnings, net earnings do not include social security contributions and taxes, but do include family allowances.
The unemployment trap is defined as the difference between the increase of gross earnings and the increase of net income when moving from unemployment to employment, expressed as a percentage of gross earnings.
The structure and development of labour costs and earnings are important features of any labour market, reflecting labour supply from individuals and labour demand by enterprises.
The EU seeks to promote equal opportunities implying progressive elimination of the gender pay gap. Article 157(1) of the Treaty on the functioning of the European Union (TFEU) sets out the principle of equal pay for male and female workers for equal work or work of equal value, and Article 157(3) provides the legal basis for legislation on the equal treatment of men and women in employment matters.
The European Commission has confirmed that ‘reducing the gender pay, earnings and pension gaps and thus fighting poverty among women’ is among its top priorities. It has undertaken a number of initiatives in this field as part of the Gender Equality Strategy 2020-2025.
The Commission communication that outlines this strategy calls for an increased participation of women in the labour market and equal participation across different sectors of the economy and working-time patterns. Moreover, it stresses the need for affordable care services of sufficient quality and calls for a better sharing of unpaid working hours between women and men.In addition, it calls for policies and measures for those facing particular barriers to entry into the labour market, such as migrant women and single parents.
What is the difference between labor cost and wages? ›
The cost of labor is the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. The cost of labor is broken into direct and indirect (overhead) costs.Are wages direct labor costs? ›
What Is Direct Labor Cost? The dictionary definition of direct labor cost is: Wages incurred in order to produce goods or provide services to customers.What factors affect labor costs? ›
There are many factors that contribute to the total labor cost percentage for a business, including the type of business, the industry, the unit labor cost, location, and the number of employees. The type of work, and the wage rates can also affect the total labor cost percentage for employees.What type of cost are wages? ›
Wage expenses are variable costs and are recorded on the income statement. Under the accrual method of accounting, wage expenses are recorded when the work was performed as opposed to when the worker is paid. Under cash accounting, wage expenses are reported only when the worker is paid.What are examples of labor costs? ›
- Payroll taxes.
- Health care.
- Sick days.
- Vacation days.
Labor cost refers to the total sum of wages, benefits, taxes and insurance paid to employees by an employer.Are wages direct or indirect costs? ›
Direct costs generally include: Salaries are wages (including vacations, holidays, sick leave, and other excused absences of employees working specifically on objectives of a grant or contract – i.e, direct labor costs). Other employee fringe benefits allocable on direct labor employees.What is labour cost also called as? ›
Labour costs represent the total expenditure incurred by employers for the employment of employees. They represent a cost of salaried labour force, that is why they are sometimes referred to as salary costs.Why wage is direct cost? ›
Raw materials and the cost of labour used during the manufacture of the product are good examples of direct expenses that are easily traced back to the product. Depending on the business you run, wages or salaries may also be viewed as direct expenses. Direct expenses are most often variable costs.How do wages affect labor supply? ›
When wages increase, the opportunity cost of leisure increases and people supply more labor. Interestingly, this is not always the case! At higher wages, the marginal benefit of higher wages becomes lower and when it drops below the marginal benefit of leisure, people switch to more leisure and less labor.
What are the 5 factors affecting labor? ›
Factors Affecting Labor. At least five factors affect the process of labor and birth. These are easily remembered as the five Ps: passenger (fetus and placenta), passageway (birth canal), powers (contractions), position of the mother, and psychologic response.How can employees control labor costs? ›
One way to directly curb your labor burden is to reduce Perquisites commonly referred to as "Perks", or reducing employer voluntary benefits, such as health insurance, flexible spending accounts, and retirement plans.What four factors cause wage rates to differ? ›
- Credentials. ...
- Experience and skill. ...
- Industry or employer. ...
- Job tasks. ...
- Geographic location. ...
- Success and performance.
Labour expenses are one of three types of expenses that make up a manufacturer's cost of goods sold (COGS). The other two are materials and amortization. Wages and other labour costs associated with shipping, distribution, sales and marketing are not included in the cost of goods sold.What are the 4 types of labor? ›
What are the four types of labor in economics? The four types of labor in economics are skilled, unskilled, semi-skilled, and professional.Is wages an income or expense? ›
Salaries and Wages as Expenses on Income Statement
are part of the expenses reported on the company's income statement. Under the accrual method of accounting, the amounts are reported in the accounting period in which the employees earn the salaries and wages.
The wages of line managers or administrative staff, however, is an indirect cost because it does not directly impact the product. Sales commissions are also considered a direct cost because they play a vital role in delivering the product to the customer.Are wages a fixed cost? ›
Fixed costs remain the same, whether production increases or decreases. Wages paid to workers for their regular hours are a fixed cost. Any extra time they spend on the job is a variable cost.What are the four types of labour cost? ›
The four types of labour costs include fixed, variable, indirect and direct labour.What is wage cost accounting? ›
Summary. Wage expense is a type of variable-rate cost. There are three main types of wage expenses: (1) times wages, (2) piece wages, and (3) contract wages. Wage expense is typically combined with other expenses on the income statement.
Will a worker supply more labor if wages increase? ›
If wages increase, will a worker supply more labor? Only if the effect of the opportunity cost of leisure increasing is larger than that of the increase in purchasing power the effect of the opportunity cost of leisure increasing is larger than that of the increase in purchasing power.What happens when wage rate increases? ›
Wage increases cause inflation because the cost of producing goods and services goes up as companies pay their employees more. To make up for the increase in cost, companies must charge more for their goods and services to maintain the same level of profitability.How does the demand for labor affect wages? ›
Wages in a competitive market are determined by demand and supply. An increase in demand or a reduction in supply will increase the equilibrium wage. A reduction in demand or an increase in supply will reduce the equilibrium wage.What are the 4 P's that contributes to a successful labor? ›
The ability of the fetus to successfully negotiate the pelvis during labor and delivery depends on the complex interactions of four variables: uterine activity, the fetus, the maternal pelvis and maternal well-being. This is also known as the four Ps: power, passage, passenger and psyche.What is the main cause of labor? ›
Researchers believe that the most important trigger of labor is a surge of hormones released by the fetus. In response to this hormone surge, the muscles in the mother's uterus change to allow her cervix (at the lower end of her uterus) to open.What are the causes of labour problems? ›
Possible causes include the failure to account for the negative externality of reproduction in the face of finite natural resources which results in over-supply of labor and falling living standards for wage-laborers, depersonalization by machines and poor working conditions.What is one strategy to reduce labor costs? ›
1. Combine vacation and sick leave in one paid-time-off bucket. By combining paid vacation and a reduced amount of sick leave, you can reduce your costs associated with absenteeism. For example, if you provide two weeks annual paid vacation and two weeks sick leave, instead provide three weeks paid time off.Why is it important to manage Labour cost? ›
Rational and intelligent labor cost control will boost productivity and enhance profits. By keeping a keen eye on the cost of labor, you can save money in the short and long terms. Although this is the most obvious benefit, you will learn to recognize many other benefits once you begin the process of cost reduction.What are examples of direct labor? ›
Direct labor includes all employees responsible for producing a company's products or services. Some examples of direct labor include quality control engineers, assembly line workers, production managers and delivery truck drivers.What is a direct wage cost? ›
Line 8340 – Direct wage costs
Include the remuneration you paid to employees who work directly in the manufacture of your goods. Do not include: indirect wages. a salary paid to yourself or a partner (see Part 9 – Details of equity)
What type of cost is direct labor? ›
Direct labor costs are the wages, benefits, and insurance that are paid to employees who are directly involved in manufacturing and producing the goods – for example, workers on the assembly line or those who use the machinery to make the products.Is overtime direct labor or overhead? ›
Another example of indirect labor costs is overtime.What are two labor examples? ›
Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school.