An input\u2013output analysis of unit labour cost developments of the German manufacturing sector since the mid-1990s

Nora Albu,Heike Joebges,Rudolf Zwiener

doi:10.1186/s12651-022-00306-7

Nora Albu, Heike Joebges + Show 1 more

Open Access

https://doi.org/10.1186/s12651-022-00306-7

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Abstract

According to empirical studies, a statistically significant factor for German exports success is high cost (or price) competitiveness. Studies by Deutsche Bundesbank recommend correcting the nominal effective exchange rate by broad cost (or price) indicators (Deutsche Bundesbank, 1998, 2016a). This would call for total economy unit labour costs. In contrast to these findings, Dustmann et al. (2014) suggest using refined unit labour costs for the exporting manufacturing sector only, corrected for inputs from other sectors and from abroad in an Input–Output (IO) analysis framework. According to these authors’ novel calculation, the export-oriented manufacturing sector of Germany experienced a decrease in unit labour costs by 25% between the mid-1990s and 2007. We try to replicate their findings. Following standard approaches in calculating sectoral unit labours costs, correcting for inputs from other sectors and from abroad, and using consistent input–output data from the Federal Statistical Office and from the World Input–Output Database, nominal unit labour costs of the manufacturing sector did not decrease over the period of analysis, and developed similarly to total unit labour costs. The similarity to total economy costs is also confirmed for a more recent period. In contrast to these authors’ claim, our findings are in line with recommendations of Deutsche Bundesbank for using total economy unit labour costs.

Highlights

Export growth depends on several factors: price or cost competitiveness, non-price competitiveness, the structure of export products, growth in export destination countries, and, as a result, demand from these countries
Even though manufactured goods dominate German exports, real effective exchange rate (REER) adjusted for unit labour costs of the manufacturing sector would yield a distorted picture of cost competitiveness of German exports, as they do not include the cost relieving effect of intermediate goods from other domestic sectors and imported intermediaries (Deutsche Bundesbank, 1998, pp. 41–45)
Our paper replicates the approach by Dustmann et al (2014): We calculate unit labour costs of the manufacturing sector based on a full input–output analysis, taking into account inputs from other domestic sectors and imported inputs

Summary

Introduction

Export growth depends on several factors: price or cost competitiveness, non-price competitiveness, the structure of export products, growth in export destination countries, and, as a result, demand from these countries (see Altomonte et al, 2013; Karadeloglou & Benkovskis, 2015 for overviews). In contrast to the Bundesbank’s recommendation to concentrate on broad cost aggregates like total economy unit labour costs, Dustmann et al (2014) stress that unit labour costs developments for the exporting manufacturing sector are the ones that should be scrutinized. Based on input–output (IO) coefficients for Germany, Dustmann et al augment sectoral manufacturing unit labour costs for outsourcing of manufacturing production to the services sector. They include imported inputs of the manufacturing industry. According to their novel method, unit labour costs of manufacturing exports decreased by a quarter during 1995 and 2007 Based on these findings, they claim that the real increase in German price competitiveness is higher than measured by OECD data for total economy unit labour costs. The enormous decrease in production cost “[...] has been the main reason for Germany’s economic success over the last decade.” (Dustmann et al, 2014, p.168)

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Conclusion