Why is compensation so much higher in the US than in Western Europe on average? [closed]

Question

I'm referring to this result the latest SO developer survey revealed:

Stack Overflow Developer Survey 2015: The Results

Given that socioeconomic parameters and standards of living are fairly equal among the two, this seems surprising.

Answer 1

Having lived in both the US and Western Europe, working as a software developer....comparing salary is difficult.

First - you have an exchange rate. In Western Europe, outside of the UK, you'll (probably) be paid in Euro (depending on how you define western Europe...but this applies for any currency, although as far as I know, the euro has had the largest swings lately). The value of a Euro relative to a Dollar is in a state of constant flux. Less than a year ago, one euro was worth as much as 1.38 dollars now it is worth about 1.07 dollars. It's non-trivial to determine how much someone in the EU makes in dollars and judging from my US tax filings the amount I make each year in Euros fluctuates dramatically from year to year when converted to dollars. The Euro is currently at/near something like a 10 year low. For someone living in the Eurozone, they're unlikely to notice though, as all of their bills are paid in Euro. But when comparing to the dollar, it looks pretty bleak.

Second - you have completely different compensation packages. This is true of comparing any two jobs, but it's even more so when different countries are involved. In the US, typically, your salary is just your salary. Your health insurance and related benefits (including a 401k) come out of your salary (usually pre-tax). So, if you want to contribute 5% to your 401k and be on the companies insurance plan that reduces your salary. In the EU (or at least in my experience), your pension contributions are NOT included in your salary, nor would you typically pay for health insurance from your salary. And, in my experience the pension contributions are a lot more significant than the 401k - (15% of my salary verse up to a 5% matching contribution). Also, what is considered a typical amount of vacation time in the US would be very low in Western Europe. Sick time is generally handled quite differently as well, though I believe this varies quite a bit depending on the country and company. In the US I would routinely have 2-3 weeks of vacation + X days of sick time. In the EU I have 7 weeks of vacation and an unlimited amount of sick time, along with quite a bit more maternity/paternity benefits.

Third, cost of living has a large impact on salaries. Earning 65k in a small midwestern suburb might afford you a lifestyle that would take 90k in a big city or 100k in Palo Alto. Some European cities do have high cost of living, but I would imagine when you look at all of the developers in Western Europe participating in the survey, the median cost of living is lower than that of the US developers. But that's just speculation on my part.

So maybe (US salary - 401k contributions - Health care) will more closely equal (EU salary + pension contributions + employer paid health care + 3-4 weeks salary in exchange for extra vacation). And if the dollar drops unexpectedly and we were to hit a 10 year high, throw on another 25-30% to the EU salaries.

For what it's worth, personally, I didn't feel like I took a paycut at all when I moved to the EU, even though my current salary, converted to dollars is less than I made in the US when I left. In fact, I save more and travel more now than before.

Answer 2

The question surprised me, because to me it approaches the situation from a false assumption: that the salaries should be similar. Why should they? You have two separate markets for labor. It would be a very strange coincidence if they happened to end up at the same equilibrium price. It's like asking "Why is Everest so much higher than Mont Blanc", it's just not possible to reduce it to a few obvious facts from common knowledge.

If you think that a price is something which is inherent in the good being traded, then this is a false assumption. The price is determined by the market, and separated markets end up with separate prices. The American and the European labor markets are mostly separated. If a programmer in Europe gets offered 60 000 Euro and considers whether to take the offer, he is unlikely to have a high preference for the alternative of "emigrate to America, where I'll easily get a 90 000 USD offer". So the price setting in Europe happens independently.

While the factors Rob P. and Pavel Petrman mentioned do exist in reality, they are not really "the reason", or not the main reason. Even if the vacation, health insurance and other monetary-equivalent benefits were equal, most programmers would still be reluctant to emigrate to the USA for a higher salary, due to both personal and regulatory reasons. So employers could still offer a 60 000 Euro job in Europe and know that, if the candidate does not take it, the reason is not because he decided to go to the USA instead. The price is still determined by local factors, with the price in the connected market having a noticeable but small influence.

You can easily see this if you compare other countries. A programmer in Bulgaria or Romania gets a much lower salary than a programmer in Germany, even if you compare PPP and not nominal salaries. And the nonmonetary benefits outlined in the other answers are also worse in Bulgaria and Romania than in Germany. Despite there being no regulatory barriers whatsoever (no work visas required), the salary levels in the three markets don't move closer to each other, and there is no mass emigration towards Germany. While the emigration flow is obviously turned towards Western Europe, the majority of the population, including the programmers, chooses to stay home and work for the salary offered in their local labor market. This disproves a simple model in which the "salary plus benefits" combination is equal across markets, even if you add real wages to your model.

The explanation of how a market arrives at a certain equilibrium and not another is fascinating, but way too long for an answer on a Stack Exchange site. In fact, even a degree in economics only gives you an incomplete picture. I realize that my answer amounts to "they are different because they have no reason to be the same", which is quite unsatisfying on many levels, but it is the only valid answer which can be given in a few paragraphs.

Answer 3

TL;DR: About a half of the money you make in Europe is subject to redistribution - appears invisible but is there somewhere.

---

Adding a bit to a brilliant answer by Rob P.

There is about a third to two thirds of every person's money totally invisible, yet make a huge difference, as Rob P. nicely explains in his answer. Put simply, health insurance, holidays, sickdays, education, you name it - everything is a public matter in Europe and subject to wealth redistribution.

Example with anecdotal evidence:

I happened to hear a rant from a Continental (the rubber company) who paid huge sum to get his education in the US and then moved to Europe for (seemingly) low-paid job. This man's salary was actually pretty high given local standards of a hi-tech German city, yet still percieved low by him.

To get a university degree in Europe can be* virtually free of charge compared to the US, and for example computer-related MSc's usually don't have to pay back a huge student loan - and companies don't have to ramp up their package offerings accordingly.

(* Situation varies hugely in both space and time. Europe is and old lady with many quirks.)

---

EDIT (to clarify some points mentioned in comments): Although compensation in Europe is usually quoted pre-tax, the situation is often complicated to such an extent, that simple calculation pre-tax to post-tax is vitually impossible. It is, for example, not unusual (as Rob P. says in his answer), that even though you, as an employee, have to subtract 20% of your pre-tax quoted compensations for taxes, the company pays another 20% to 30% from their pocket, making their pre-tax figure (saying what you cost the company in salary) considerably different from what the employee perspective shows.

For example (as @200_success commented), in Germany, you can get a company car (or one of dozen possible retirement saving plans or subsidied lunches and holidays in the Czech Republic, the list goes on) which saves you some money on one side but can have a huge impact on your tax rates, possible tax returns, mandatory retirement fund fees, the so called social insurance, the list goes on. Altough these 'tax and transfers' are usually well understood throughout a particular country, these can differ wildly from country to country which makes it difficult to compare salaries even between two European countries.

Reference: I come from the Czech Republic and currently work in Germany. I happen to have many friends working or having studied and worked throughout Europe and worldwide.

Answer 4

Adding to the answers from Rob P. and Pavel Petrman, I think a major reason for this difference is that in the US when we think of our salary, we count our take home pay + our income tax that is withheld by our employer.

In Europe, it is my understanding that when they are quoted a salary, say in a job offer, they are being told the amount they will take home after taxes (and pension contributions, healthcare, etc).

Add in the differences in sick leave and paid vacation, our European friends are probably making more (on average), than we do in the US. If they answered the survey including all of the taxes paid because of/for them, then I imagine the survey would look very different.

Answer 5

Freedom.

e.g. In Germany you have to plan with your employer when you quit your job to ensure a smooth transition or else you loose a lot of your entitlements.

In the US you can quit at any moment, for any reason, without such repercussions (legal, professional, or social). Market economics now works both ways - companies sell goods at what the market will bear and employees charge in salary what employers will bear. The US then makes it much easier, relative to Europe, for a person to start a business. New businesses that grow have to hire new people. This is why even at the federal level there is always such focus on small and medium businesses. They are the "new wood" being put on the fire whereas Europe focuses on the coals.