Policy analyses commonly assess the competitiveness of a country by the development of unit labour costs, more in particular the overall unit labour costs (Figure 1a). However, the picture emerging from overall unit labour costs is incomplete and may even be misleading. The reason for this is that sectors producing tradeable goods and services (below: ‘export sector’), are lumped together with sectors producing non-tradeable goods and services (‘non-export sector’).
DNBulletin: Competitiveness assessment should take account of per-sector labour cost development
|Date||4 July 2013|
Per-sector developments of unit labour costs may create a more detailed picture of a country's competitiveness than unit labour costs for the total economy. In Ireland, in particular, the growth of total unit labour costs was strongly driven by the wage development in construction, as against wages in tradeable goods sectors such as manufacturing.
Export versus non-export sector
To illustrate the importance of the distinction, Figures 1b and 1c present the development of unit labour costs in manufacturing and construction as representing, respectively, the export and non-export sectors. Figures 1b and 1c show that in the period between the introduction of the euro and the onset of the crisis, the increase of total unit labour costs was in some euro countries driven primarily by the non-export sector. Ireland is a typical case in point. Here, the overall unit labour costs increased strongly until the crisis erupted. In manufacturing, by contrast, net unit labour costs fell – even more steeply than in the German manufacturing industry. In Portuguese manufacturing, unit labour costs grew more or less in line with the euro area average across the entire period. Unlike in manufacturing, construction unit labour costs in Ireland and – on a lesser scale – Portugal increased at a far higher rate than the euro area average. In both Ireland and Portugal, therefore, the relative increase of unit labour costs for the total economy seems to have been driven mainly by developments in the construction sector. In Italy, meanwhile, unit labour costs in the manufacturing industry rose strongly, whereas in construction they remained broadly stable. Another situation still applies in Spain, where unit labour costs showed similar growth in both sectors in the run-up to the crisis. The period between 2008 and the second quarter of 2011 saw downward adjustments of Spanish unit labour costs in especially construction and less strongly in manufacturing. As a result, Spain's competitiveness in the international tradeable goods markets has improved less than is suggested by the relative decline of overall unit labour costs.
The main conclusion is that the development of unit labour costs may differ strongly from one economic sector to the next. For an adequate assessment of the development of a country's competitiveness, one needs to look especially at the development of unit labour costs in those sectors where tradeable goods and services are produced.