The economics of Ikea

One may conjecture that the popularity of Ikea is larger in countries with a) higher labor costs and b) shorter work hours. Ikea’s business model is to outsource as many tasks as possible to the customer, and increasingly so. To assemble Ikea furniture, you increasingly often need to drill holes and saw panels yourself. They generally can do that for you, but at a pretty high cost.

Any task performed by the customer is non taxable, whereas any task performed within the Ikea factory (or store) is taxed and subject to regulation. Consequently, a (private) surplus is generated each time technology allows to reduce the Ikea labor input associated with each piece of furniture and substitute it with the customer’s labor input. The surplus is larger, the larger the cost of labor, in particular the larger the payroll taxes, and the smaller the opportunity cost of time for the customer. This last component is smaller, the less people work in the society we consider, whether we are talking about the workweek, unemployment (voluntary or involuntary), or retirement.

These rough data broadly support my hypothesis. In relation to their GDP, Germany and France, two places where one works the least and where one pays the highest taxes (especially taxes on labor), are the two countries where Ikea is most popular. Next come Italy and the UK, that are somewhat less regulated and where people work a bit more. Finally Ikea only generates 11 % of its sales in the US, where people work more than in Europe and labor taxes are much lower, and only 5 % in low wage Asia.

Increasingly, Ikea can be viewed as a supplier of semi-raw materials and services in order to help you engage in DIY acfivities. As this results from a huge tax (and regulatory) distortion, it is probably an inefficient way of operating. If markets were not distorted the hourly labor cost at Ikea would be on average the same as the opportunity cost of labor for the customer (in fact it depends on how rich the customer is, but let us assume for simplicity that the customer is an “average” person whose wage is the same as the Ikea workers). A specialist would spend far less time installing an Ikea kitchen than the customer, who would earn more money than the cost of the kitchen if he were to use all those hours working in his regular job — in which he has a comparative advantage — instead of installing the kitchen. People would then buy entire kitchens from Ikea instead of installing them themselves. But because of the tax distortion the customers’ foregone wages from installing the kitchen themselves (from which all taxes are deducted, and which may even be zero if the customer is unable to work more for regulatory reasons or because of unemployment) will typically be lower than the market value of these installation services, all tax included.

As a result, there are not enough skilled people employed in the kitchen assemby occupation, and too many incompetent amateurs spend their spare time assembling kitchens.

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