International competitiveness
Despite their frequent use, unit labour costs (ULCs) are an incomplete measure of international competitiveness, as they deal exclusively with the cost of labour and do not consider changes in the cost of capital or intermediate inputs. For this reason, they need to be complemented with other indicators. In an era of global value chains, a measure based only on the costs of domestic labour may not be representative of overall cost competitiveness of firms within a country. Moreover, ULCs as a measure of cost-competitiveness cannot capture the capacity of firms to serve international markets through high quality goods and services and where demand is relatively price inelastic.
Over the last 15 years, global market shares for all G7 countries have decreased, partly reflecting the growth of emerging economies. But the pace of this decline has varied across countries. In Germany and the United States, for example, where ULCs have been kept in check compared with other countries, export performance held up well, while the opposite was true for Canada, France, Italy, and the United Kingdom. In Japan, the market share fell despite declining ULCs and real effective exchange rates.
Definition
Export performance is measured as actual growth in exports relative to the growth of the country’s export market. The export market share for a single country measures the share of exports by firms in that country in relation to world exports of all countries. Real effective exchange rates take account of price level differences between trading partners and provide an indication of the evolution of a country’s aggregate external price competitiveness. ULCs are defined as the average cost of labour per unit of output produced.
Comparability
Export performance and export market shares are based on gross trade data which may overstate the performance of countries specialised in goods and services that are typically downstream in global value chains, and so have lower value added to export ratios.
Trade statistics do not always consistently measure flows between affiliated enterprises. This is especially so for trade in intellectual property products where payments may often be recorded as property income payments.
Manufacturing ULCs are often perceived as more representative for competition in tradable products, but they do not account for the increasing trade in services. Services prices are often not very reliable, and therefore may affect cross-country comparability of ULCs in business sector services. Looking at total economy ULCs somewhat alleviates these concerns, but their coverage goes significantly beyond the tradable sector. ULC data are only presented for those countries for which sectoral hours worked data are available according to the ISIC Rev.4 classification in the OECD National Accounts Statistics (database).
References
Durand, M., J. Simon and C. Webb (1992), “Indicators of international competitiveness”, OECD Economics Department Working Papers, No. 120, https://doi.org/10.1787/708306180711.
OECD Economic Outlook: Statistics and Projections (database), https://doi.org/10.1787/eo-data-en.
OECD National Accounts Statistics (database), https://doi.org/10.1787/na-data-en.
OECD Productivity Statistics (database), https://doi.org/10.1787/pdtvy-data-en.
