Outsourcing & investment considerations

A number of factors should be taken into account when assessing the labour cost advantages of the region.

Firstly, labour cost differences within the Central and Eastern Europe region are vast, with some countries as cheap as China or Thailand so far as labour is concerned, and others as expensive as Portugal or Israel.

Secondly, differences between sectors of the economy (such as Manufacturing or Financial Intermediation) are greater in countries with lower overall labour costs. This is partly a reflection of higher differences in earnings between low and highly skilled labour. The rule of thumb here is the lower the average earnings in the economy the higher the premium skilled workers earn above the national average.

Thirdly, capital cities tend to have significantly higher earnings and labour costs than the rest of the country, including other major cities. In most CEE countries average earnings are about 50% above the level of regions/counties with the lowest earnings and are significantly above the level of other bigger cities.

Fourthly, according to data available for a number of countries, labour costs in foreign-owned companies are significantly (20–40%) above the national average.

Strong economic growth and effective appreciation of local currencies should ensure that further increases of earnings and labour costs slowly erode the competitiveness of at least the more advanced CEE countries.

Our five-year forecast indicates that within the next five years the Euro value of average earnings and labour costs will increase by between 34% and 119% in thirteen countries covered by Database Central Europe.