There’s a rather constant narrative among various commentators that as long as Greek minimum wages are much higher than other EU members (such as Bulgaria and Romania) or quite close to the rest of the periphery, there’s no way to attract FDI which will just head to other countries. The problem is that this line of reasoning does not take into account a couple of facts:

  1. Wages are not the only cost element in determining the target country of a new investment. Other major factors include the effective tax rate, the ease of making business, social contributions rates, access and cost of credit and capital available in the country (social capital in the form of educated labor, transportation infrastructure and so on).
  2. Wages are not what determines the cost of production but labor costs which are determined by productivity. Germany might have very high wages but also maintains significant productivity per worker/hour worked with the end result that its actual labor costs are not that different than other countries (especially after taking into account its much larger stock of physical and social capital).

To illustrate the second point I ‘ve calculated Unit Labor Costs in PPS using data from Ameco (Compensation of employees: total economy (UWCD) / Gross domestic product at current market prices (UVGD)) for the periphery countries and Bulgaria, Romania. ULC have been indexed with Germany acting as the base (100). The results are that Greece has always been a very low cost country (taking into account its high levels of productivity) and is already (2012) much cheaper than Bulgaria or Romania (2012 figures: 63.5 for Greece vs 71.4 for Bulgaria and 70.3 for Romania). As a result, I do not believe that any further reduction in minimum wages can be productive in any way. What is needed is a reduction in other factors constraining FDI (especially access to cheap credit).

ULC PPS

ULC PPS since 1995 and corresponding graph:

ULC chart