The international comparison shows: The lower the unit labour costs – the ratio of labour costs to productivity – compared to the competition, the greater the export success in most cases.
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Unit labour costs indicate how high the labour costs are per unit of value added. In the national account systems, unit labour costs are calculated by dividing the employee compensation per hour by the gross value – that is, the value of goods produced minus the cost of intermediary goods bought in addition – per hour worked by all employed persons (including the self-employed). If the unit labour costs are calculated for the economy as a whole, the gross value added is replaced by the GDP.
Unit labour costs indicate the ratio of labour costs to productivity. The labour costs comprise the gross earnings of employed persons and the additional costs carried by the employer in the context of the employment relationship. These include such costs as employer contributions to social security, the employer’s pension scheme, training and development expenses, costs connected with special workplace facilities and severance pay. If productivity increases or wages decrease, this results in a decrease of unit labour costs. For instance, capital-intensive production can lower the unit labour costs, because it allows more to be produced with the same amount of labour. Employment cutbacks can also increase overall productivity, since dismissals generally first eliminate jobs with the lowest rate of productivity.
The unit labour cost position makes it possible to compare a country’s unit labour costs with those of its competition. In this chart, the unit labour cost position of the depicted countries was indexed at 100 in the year 1991. If the figure increases to above 100 in the years after 1991, this means that the unit labour costs increased relative to the competition’s average; either the country’s unit labour costs increased at a faster rate or decreased at a slower rate than those of the competition. In addition, currency exchange rates can influence the pace of change.
Thus, a higher figure for the unit labour cost position doesn’t mean the unit labour costs are higher than average; rather, it means the particular country’s production is more expensive compared to the costs in 1991, relative to the other countries. From a company’s perspective, decreasing unit labour costs – relative to the competition – constitute an improvement in the company’s cost competitiveness. From the employees’ perspective, if a higher figure for the unit labour cost position is the result of hefty pay increases, they may first assess this development as positive – and it may also be manageable for the company; however, if wages increase too much, this poses a threat to jobs, which is ultimately something the employees also won’t be interested in seeing.
Legend: Between the years 1996 and 1997, Germany’s unit labour cost position improved by 10 per cent compared to the competition. However, the position declined by 15 per cent compared to the base year.
The export performance indicator shows the relationship between a country’s exports and the growth of its export markets. If the export of a country’s goods and services increases faster than the total imports of its target countries, then the exporting country is considered to have gained market shares and improved its export performance. For instance, if Germany, in the year 2010, exports 50 per cent of its goods and services to China and 50 per cent to France, and if China’s total imports double during the same year while France’s remain the same, then Germany – even with the same amount of exports – would be considered to have lost 50 per cent of its market share on the Chinese sales market but to have held its position on the French market. Hence, Germany’s export performance would have declined by 25 per cent in total.
As evident in this chart, the unit labour cost position is a significant factor in a country’s export performance. These two indicators typically demonstrate inverse trends: when the unit labour cost position decreases, the export performance increases – and vice versa. Besides cost competitiveness, factors such as the exporting company’s customer focus and the reputation of a brand or even of an entire country can influence the number of foreign markets interested in a particular product. In some countries, the other factors are even more important than unit labour costs when it comes to export performance. Japan, for instance, has been struggling against an economic crisis for years now; despite the decreasing unit labour costs, the country’s exports have failed to really take off.
The manufacturing industry is at the centre of international competition. Most tradable goods are industrial products. In the countries represented in this chart, such products make up nearly three-fourths of total exports. Hence, the fact that services are also included in the export performance does not generally lead to a major distortion of the figures presented. At 84 per cent, the share of exported industrial products is highest in Germany. The share is lowest in Greece, with industrial products accounting for only 52 per cent of its total exports.
Why was 1991 chosen as the base year?1991 serves as the base year in order to facilitate a long-term comparison of the unit labour cost position. This specific base year makes it possible to examine the aftermath of the German reunification, the preparation for the European Monetary Union, and the impact of the euro and euro crisis as well as the subsequent structural reforms in the affected countries.
The unit labour cost position of the 16 countries represented here was determined by comparing each country against the weighted average of the other 15 countries and Norway. The weightings are based on the export figures from the years 2012 to 2014. The comparison shows, for example, that the USA has a weighting of approximately eight times that of Norway.