Businesses with supply chains and operations in Myanmar, Bangladesh and Cambodia are benefiting from the world’s lowest labour costs. However, the company warns that while the cost competitiveness of these labour markets is extremely attractive, it may be offset by the risks posed by poor working conditions and high levels of child labour and trafficking.
Legal and Regulatory Environment Risk Atlas 2015
Efficient and responsible business requires a thorough understanding of the regulatory environment. This Atlas introduces a new Legal and Regulatory Environment Risk Index (LRERI) and scorecards, that together function as a key resource for the analysis of regulatory risks including governance issues, bureaucracy and corruption and labour supply chains. The LRERI identifies countries of 'high' and 'extreme risk' to business (i.e. where there are poor legal frameworks and enforcement) and provides insight into potential risk mitigation activities. The LRERI was developed to assess the legal and regulatory environment and risks across 173 countries and 26 risk indices divided into seven thematic pillars: Rule of Law, Corruption Risk, Corporate Governance, Regulatory Framework, Respect for Property Rights, Supply Chain Labour Risk and Costs of Doing Business. New indices added this year include the Tax Burden Index, the Labour Costs Index and the Barriers to Entry Index.
Our Labour Costs Index 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.
Italy and France most costly countries to hire staff
Western Europe, which is identified as possessing the most expensive labour markets globally, makes up the majority of the 25 highest cost countries in the index. Consequently, 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 ten most costly countries include: 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 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 Labour Costs Index, 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 OECD countries was 17.5%.
“The cost of employing staff is a key consideration for companies when they consider where to invest. Countries that have high labour costs relative to productivity levels risk deterring mobile international capital that can bring jobs and growth in its wake.”
Charles van Caloen, Senior Analyst
Most cost-competitive labour markets blighted with social and compliance risks
China, which is ranked 64th in the Labour Costs Index, 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-cost 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 per month in China, according to the International Labour Organization. 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, we warn 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’ 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.”