There are four main factors which are important in determining production costs for firms. These include labor, land, capital, and entrepreneurial input, the latter being an intangible cost. Labor is a primary factor of production because it determines the utilization and productivity of the other factors of production. Labor can be categorized as skilled having a formal training in the area of production or untrained labor having no specific training. Firms and companies invest heavily in improving and retaining labor and at the same time meet the several government regulations on labor. The companies mainly spend on labor compensation, labor taxes, and contributions. Depending on the country’s labor laws and government regulation, the amount of labor taxes and contribution differ from one country to another. Some of the countries where the highest shares of profits go into labor taxes and contributions are looked at below.
France’s economy is highly diversified with a significant growth rate, especially between the years 2014 and 2015. However, government spending, unemployment, and debts remain high. The labor market in the country remains stagnant because of the rigid labor codes and regulation that have increased unemployment and hurt competitiveness. France labor laws require that the firm meet some of the employees’ expenditure which is sometimes high. These include the health expenditure of the employees and that of their family members. The firms are also expected to make a higher social security contribution that insures the employee against sicknesses, retirement, unemployment, and training. The laws also require that firms employing less than 25-year-old workers to pay incentives to them. Employees also enjoy a privilege of fully paid leave of up to a maximum of five weeks while through profit sharing directors and management team are entitled to other benefits and incentives apart from allowances and salaries. Firms in France spend 53.5% of their profits on Labor tax and contributions to workers.
Belgium is a leading country with one of the highest costs of labor in the European Union. For every euro an employee pockets an employer must spend 2.52 Euros in the country. The country also has the highest tax burden in the region. Belgium’s employer social security contribution and income tax are second highest in UE. The law requires high compensations for employees including 50% of the hourly pay for overtime and a minimum wage of $2331. Non-salary cost of hiring workers remains high across Belgium. The government also imposes high tax and price controls especially in the labor market leading to firms spending 49.4% of their profits on labor taxes and contribution to employees.
Italy is currently undergoing economic reforms, especially in the labor sector, to reduce the costs of labor and to increase efficiency in the labor market. The regulatory complexity has increased the cost of entrepreneurial activities and delays while labor market rigidity has constrained job growth. Social security contributions and income tax are still very high. The employers have to spend 43.2% of their net income on labor taxes and contributions to employees.
Downsides of High Labor Costs
The high rates of labor taxes and contributions to employees have significantly limited the growth of labor markets in these countries. Due to the high cost of labor, the firms are finding it a challenge to hire more people or retain their workforce. Most of these firms layoff majority of their staff to reduce on labor expenditure. The rate of unemployment thus continues to grow in some of these countries.