Thursday, June 28, 2007

On Comparing Wages Across Central Europe

A recent study by the Slovak Ministry of Finance (in Slovak) revealed problems in inter-temporal comparisons of 'gross wages'. The trick lies in the definition of gross wage, which varies over time as social security or other payments are shifted from employer to employee or vice versa. The same problem, with the addition of currency and price level conversions, appears with inter-country comparisons.

For these reasons, comparing total labor costs (or 'super-gross wages'), or just net wages seems to be a much more reasonable solution to assess living standards of the local working populations. Here's the
2006 data for V-4 countries: an average monthly salary of an employee in the economy, first converted into euro according to official 2006 yearly exchange rates, and then adjusted for the respective price levels (of 2004) relative to the European Union average.

--SGW ----GW ---NW
CZ 1854 1374 1064
HU 1531 1136 750
PL 1634 1356 920
SK 1250 988 768

Note that GW stand for gross wage's purchasing power in euro, SGW for 'super-gross wage' (including employers' social security contributions), NW - net wage. SGW and NW were calculated according to the OECD information on labor tax wedges in 2006.

An informed observer might spot that the purchasing powers of average wages across V-4 countries do not correspond to GDP/head rankings of these countries. Slovakia, for example has higher GDP/capita in PPS than Poland, but lower wages. In order to explain these differences, one ought to look closer at the labor productivity statistics, as well as the local definition of a 'salary' (as opposed to other income).


Antal Dániel said...

I find these data quite intersting. Just a short calculation on the tax burden, if your data is correct. The percentage values are the euro incomes compared to the SGWs (the cost of a worker)

CZ 74,11% 57,39%
HU 74,20% 48,99%
PL 82,99% 56,30%
SK 79,04% 61,44%

I wonder who you can translate this to living standards. Hungary's very low level of NW is a result of the high social security burden, which comes (came) with a lot of free public services that were not free of charge maybe in other V4 countries. Before 2007 basically all public health services were free in Hungary.

Michal Lehuta said...

good point. another one to consider would be indirect taxation such as VAT - the difference between SGW and NW might not be that high if most of the government's income comes from VAT, for example..