The ULC Ratio
"The
unit labour cost measure is a ratio that is constructed from a numerator reflecting the major cost category in the production process (labour compensation) and a denominator reflecting the output from the production process (GDP or value added). Countries with a low level of
unit labour costs relative to other countries may be regarded as cost competitive. "
(van Ark, B. et al.,
Unit Labour Costs, Productivity and International Competitiveness,
Groningen Growth and Development Centre, 2005, visited 2011-07-28)
Unit Labour Cost, Productivity and Competitiveness
"The
ULC […] measures the capacity of the economy to accommodate for an increase or decrease in labour compensation in relation to its output creation. However, the precise interpretation of a change in
ULC or a difference in
ULC levels across countries always depends on the source from which the change originates. For example, an increase in labour cost can either result from upward wage pressure or from a slowdown in productivity growth. The upward wage pressure may be largely an external phenomenon triggered by, for example, an appreciation of a country's currency, or it may have a domestic cause due to, for example, a shortage of labour. A productivity slowdown may be caused by a rise in the sectoral share of the services sector, as seen in many developed economies. Productivity in services usually grows more slowly than manufacturing productivity, whereas the development of labour cost is often less diverse across sectors. Slow productivity growth, however, may also be due to lack of technological progress or slow reforms in product and labour markets. The causes of the changes in
ULCs, therefore, have important implications for labour and product market policies, technologies and innovation policies as well as foreign trade policies. […]
The
ULC index should not be interpreted as a comprehensive measure of competitiveness for several reasons. […]
ULC measures deal exclusively with the cost of labour. Even though labour costs account for the major share of inputs, the cost of capital and intermediate inputs can also be crucial factors. […] Competitiveness is also determined by other factors, notably by technological and social capabilities and by demand factors."
(van Ark, B. et al.,
Unit Labour Costs, Productivity and International Competitiveness,
Groningen Growth and Development Centre, 2005, visited 2011-07-28)
A Measure of International Competitiveness
"Countries with rapid productivity growth rates are better positioned to sell their products and services at lower prices. However, competitiveness is not determined only by productivity, but also by the cost of inputs in the production process. […]
The Organisation of Economic Co-operation and Development (OECD) published trade-weighed
unit labour cost indices for each OECD country. […]
Such comparisons of levels shed light on several key debates in the area of international competitiveness. For example, high-wage economies are often concerned about their relatively high level of labour costs in producing particular goods and services compared to low-wage economies, in particular to the extent that such lower labour costs are the result of lower taxation, smaller social security payments, lower expenses on high-skilled labour for R&D and innovation and, in some cases, lower labour standards. On the other hand, low-wage economies are concerned with protectionist tariff and non-tariff measures implemented by high-wage economies that hinder exports of the goods and services in which low-income economies have a comparative advantage. […]
ULC measures also do not have the same coverage as some of the broader composite competitiveness indicators that have gained popularity in recent years. These broader indicators also take into consideration measures of economic performance, innovative capacity, structural change, improved living standards and social conditions. Selections of such indicators are taken on board in composite indicators such as, for example, the ‘World Competitiveness Index' of the International Institute for Management Development (IMD), the ‘Growth and Business Competitiveness Indexes' of the World Economic Forum (WEF), the ‘Structural Indicators' of the European Union and the ‘Human Development Index' of the United Nations."
(van Ark, B. et al.,
Unit Labour Costs, Productivity and International Competitiveness,
Groningen Growth and Development Centre, 2005, visited 2011-07-28)
"When relative levels of output and productivity are taken into account, higher-wage countries emerge as the most competitive. […] Differences in labour costs [are] more or less offset throughout the EU by differences in productivity. Relatively high wages, for example in Denmark, [are] not reflected in uncompetitive
unit labor costs; and low wages in Greece and Portugal did not carry any relative advantage."
(Tsogas, G.,
Labor Regulation in a Global Economy, Armonk, London: M. E. Sharpe, 2001, p. 144)