There is a great deal of discussion lately in Greece about the need to reduce labor costs (i.e., salaries) in the private sector in order to increase Greece’s competitiveness. The theory is that by reducing their labor costs Greek companies will be able to deliver cheaper products and services, thus become more competitive, increase their exports and lead Greece out of the slump.
This is utter nonsense.
Even at a macroeconomic level, “the belief that low nominal wage growth vis-à-vis that of productivity will restore competitiveness and eventually lead back to growth is at best too simplistic and does not have strong empirical evidence” .
But this post is not about macroeconomics.
It is about a strong belief that the way to compete at an international level is by delivering better, more innovative, more desirable or in some other way differentiated products or services, not cheaper. This is especially true for Greece that does not have a mass manufacturing or heavy industry tradition. Unless of course Greece aspires to become a third world country.
Can any Greek company achieve global competitiveness by paying people less? Quite the contrary. If you want to build better products or services, you hire the smartest people out there and you set upon a very ambitious journey with them that handsomely rewards success. Top talent doesn’t (and shouldn’t) come cheap.
Even if you want to build a cheaper (yet high quality) product or service, you still need some very smart people to do that. I don’t think Salesforce.com disrupted a whole industry and killed giants such as Siebel by hiring the cheapest people they could find or by offering smart people less money.
When you pay peanuts, you (most often) get monkeys and that’s certainly not the way to build a highly competitive company.
 Jesus Felipe and Utsav Kumar, “Unit Labor Costs in the Eurozone: The Competitiveness Debate Again”, Feb. 2011