Unit Labour Costs Research Articles

Does globalization create a ‘level playing field’ through outsourcing and brain drain in the global economy?

Rapid globalization driven by the development needs of transition economies, economic reform in developing countries, and unprecedented productivity growth owing to lower unit labor cost, Information and Communication Technology (ICT) revolution, and international movement of labor has posed a challenge for maintaining a sustainable economic growth worldwide. Using qualitative analysis based on data from various secondary sources, we note that both outsourcing and brain drain have intensified over the years as more and more countries are now embracing globalization as a strategy for higher economic growth and development. While the benefits of globalization can differ across countries, it seems that outsourcing and brain drain can bring into play some offsetting forces that are likely to bridge the gap between advanced and developing countries by creating a ‘level playing field’ in the global economy. While the developing and emerging economies are losing skilled labor through ‘brain drain’ to the advanced nations, they are gaining remittance earnings from those nations. At the same time, outsourcing from the advanced countries has created new employment and other opportunities in developing and emerging markets. Although the final impact of outsourcing is debatable, it is very likely that companies will intensify such activities in future due to strong evidences in support of significant cost savings. The outflow of skilled manpower, popularly called brain drain, from developing countries is also likely to increase due to growing demand for ‘replacement migration’ from advanced countries. Increasing job gains from outsourcing and the associated benefits on the economies of developing countries are likely to cancel out the perceived negative impact of brain drain, argued in this paper. The implication is that developed countries should ideally target the relatively poorer countries in their plan for outsourcing, because they are still deprived of the benefits of job creation, though these countries are losing their high-skilled manpower through brain drain.

Trade in Value Added: Do We Need New Measures of Competitiveness?

It has been argued that the increasing importance of global value chains necessitates a modification of conventional competitiveness measures. We compile a broad dataset including value added trade, gross exports and conventional and value added based real exchange rates. To sharply focus on external competitiveness, a new price competitiveness indicator is introduced, the TWULC (Trade Weighted Unit Labour Cost indicator). It weights sector-specific cost trends according to sector shares in exports. Econometric tests for a panel of 38 countries show that the focus on value added trade generally improves the explanatory power of export equations. Value added exports’ sensitivity towards real exchange rates is up to four times higher than that of gross exports. Real effective exchange rates focusing on exporting industries and on value added weights yield more robust results across the specifications, but do not systematically outperform the more conventional measures of price of cost competitiveness.

How the Western Balkans Can Catch Up

Countries in the Western Balkans – Albania, Bosnia and Herzegovina, FYR Macedonia, Kosovo, Montenegro and Serbia – all aspire to membership of the European Union, but they face a major convergence challenge in terms of living standards. The main reason behind this prosperity gap lies in the failure over the years of Western Balkans countries to be competitive, meaning that they lack the appropriate factors and institutions needed for high levels of long-term productivity. The key issue is whether the Western Balkans countries can narrow the gap in the coming decade and, if so, what do they need to do to achieve this. The vital requirement for catching up with the rest of the European Union is a boost to investment in the region. The Western Balkans have a number of attractive features for investors. The long-term EU perspective is a major plus and a unique quality of the region compared with other emerging markets, as it helps to anchor market-oriented reforms and European standards. Strong macroeconomic stability, strategic geographic location, diverse economies, favourable tax regimes and low unit labour costs, combined with a relatively well-educated population, are common attributes throughout the region. Looking ahead, sources of growth include trade integration, within the region and with the rest of the world, exploitation of the region’s energy resources, improvement of the transport infrastructure and technological innovation. However, long-term challenges remain, such as the possibility of a slowdown in reforms, risks posed by financial instability, adverse demographic trends and climate change. But provided governments in the region remain committed to reforms and regional cooperation, these challenges can be mitigated, if not overcome.

Trade in Value Added: Do We Need New Measures of Competitiveness?

It has been argued that the increasing importance of global value chains necessitates a modification of conventional competitiveness measures. We compile a broad dataset including value added trade, gross exports and conventional and value added based real exchange rates. To sharply focus on external competitiveness, a new price competitiveness indicator is introduced, the TWULC (Trade Weighted Unit Labour Cost indicator). It weights sector-specific cost trends according to sector shares in exports. Econometric tests for a panel of 38 countries show that the focus on value added trade generally improves the explanatory power of export equations. Value added exports JEL Classification: F14, J30

Commodity prices, the exchange rate and manufacturing in South Africa: what do the data say?

Purpose – The purpose of this paper is to investigate the empirical relationships between changes in OECD output, commodity prices, the real exchange rate, real money supply, unit labour costs and manufacturing in South Africa. In particular, to test a version of the Dutch disease argument that increases in the prices of South Africa’s main commodity exports have had a negative effect on domestic manufacturing against the alternative hypothesis that there is a positive relationship between such changes in commodity prices and domestic manufacturing output. Design/methodology/approach – Construction of a model including real manufacturing output in South Africa as the dependent variable and the following independent variables: OECD output, an international real metals price index, a real effective exchange rate index, real M3 money supply and manufacturing unit labour costs. The time series sample data comprise 124 quarterly observations for the period 1980-2010. The model equation was tested and estimated using a Johansen cointegration approach. Findings – The main findings are: OECD output is the single most important determinant of domestic manufacturing output; while the real exchange rate has the predicted negative sign, rising commodity prices are associated with increases rather than decreases in domestic manufacturing and; large increases in unit labour costs since the early 1980s have dragged down manufacturing over the sample period. Originality/value – The finding of a positive relationship between commodity prices and domestic manufacturing means that the Dutch disease argument must be revised when applied to South Africa. While rising commodity prices may lead to a negative exchange rate effect on manufacturing competitiveness, this is more than offset by the positive growth effects associated with upswings in the commodity price cycle.

Government size, institutions, and export performance among OECD economies

With a panel of 18 OECD countries, 1980–2005, we investigate the determinants of export performance, in particular the effects of the size of government and institutional features. In a model of endogenous extent of domestically-produced goods, government size has a non-linear effect on export performance; the export-maximising size of government (tax receipts) is around 40–45% of GDP; the best size of productive government spending is around 16% of GDP. Product market and labour market-related rigidities affect negatively the export performance both on their own and via a negative effect on the effectiveness of R&D and slow down the speed of adjustment. Among traditional variables, relative unit labour cost, R&D shares in GDP, TFP growth and human capital show up significantly and with the expected signs.

An empirical inquiry into the determinants of public education spending in Europe

This paper makes two important contributions. Firstly, it uncovers some of the main economic determinants driving the dynamics of public education spending in Europe. Drawing mainly on the insights provided by Baumol’s cost theory, the baseline specification uses unit labour costs and real GDP per capita as its main determinants. Some important institutional rigidities are also highlighted. The results confirm the fast relative increase in education costs, exposing the long-term affordability challenge of public education investment. Secondly, by including a policy objective and translating the empirical specification into a decision rule, the paper touches on some less mentioned determinants, such as policy commitment. Unfortunately, there is only weak overall evidence that public education spending would increase in response to a lack of progress in the policy objective. Finally, policy implications are discussed. JEL: D78, H41, H52, I22

Overborrowing and Balance of Payments Imbalances in a Monetary Union

AbstractThe sources of the balance of payments imbalances in the Euro area can be characterized by a combination of four phenomena: (i) the credit imbalances between the core and the periphery of the Economic and Monetary Union (EMU) (ii) the credit misallocation between the tradable and the nontradable sectors in the periphery (iii) the rapid increase in the output and the price of nontradable goods in the periphery since the beginning of the EMU and (iv) the current account imbalances within the EMU. This paper explains all four of these stylized facts within a single model as a result of the interaction between the common monetary policy, inflation heterogeneity and a relaxation of the credit constraint in the nontradable sector of the periphery. When nontradable goods are used as collateral, an increase in their prices can initiate an overborrowing spiral and lead to a balance of payment imbalances. Furthermore, the model endogenizes differences in unit labor costs between the core and the periphery of the Euro area.

Measurement matters: Productivity-adjusted weighted average relative price indices

Commonly used trade-weighted real exchange rate indices are computed as indices-of-indices, and thus do not adequately account for growth in trade with developing countries. Weighted Average Relative Price (WARP) indices solve this problem but do not control for productivity differences, as developing countries are observed to have lower price levels via the Penn Effect. I remedy these problems in two ways. First I propose a Penn Effect productivity adjustment to Weighted Average Relative Price indices (P-WARP). Secondly, I introduce a Weighted Average Relative Unit Labor Cost index (WARULC) for manufacturing and show that this measure does a much better job predicting trade imbalances and declines in manufacturing employment than the IMF's Relative ULC measure created as an index-of-indices. The new series reveal that for many countries currently mired in liquidity traps, relative prices reached historic highs heading into the financial crisis of 2008. I document that in 2002 – during the surprisingly sudden collapse in US manufacturing – US relative prices had not been that overvalued relative to trading partners since the worst year of the Great Depression.

Labor Productivity and Labor Compensation

This work is devoted to a comparative analysis of how the Russian economy's labor productivity and labor compensation change over time. The author discusses the widespread notion that increases in labor costs are outstripping increases in productivity. He shows that this notion has little in common with the realities of the contemporary Russian economy. Furthermore, a stable relationship has not been observed. With respect to labor power, waves of relative price reductions alternate with waves of relative price increases. However, the trend toward reduced unit labor costs is dominant. Calculations show that Russian enterprises had a lower cost of labor power (in relative terms) in 2011–2012 than in the mid-1990s and early 2000s.

Investment, asset market, and the relative unit labor cost in Mexico

The paper estimates equations for the Mexican/US manufacturing relative unit labor cost (RULC), and finds significant effects from asset market variables like interest rate differentials, foreign reserve accumulation, and international capital flows. The equations are motivated by a simple decomposition that reveals the roles played by relative manufacturing prices and real product wages—and hence the nominal exchange rate—in the upward trend of RULC. The paper follows to estimate equations for aggregate private investment in Mexico, finding a negative RULC effect that agrees with the recent literature on the real exchange rate’s profitability (or development) channel. All the estimations focus on long-run effects, applying the bounds testing approach to quarterly data from 1988 to 2013. The results imply that both the repeated surges in capital inflows and the disinflationary stance of monetary policy in Mexico contributed to the upward trend in RULC, which affected the country’s economic growth negatively by its depressing effect on investment.

A Marxist Approach of the Middle-Income Trap in China

Since 2012, China is confronted with a slowing down of its economic growth, and various studies about the middle-income trap wonder about the capacity of this country to reach the category of high-income per capita countries. Most of the time, the increase of wage costs, and more particularly of unit labor costs, is accused of being responsible for this slowing down, through the loss of international competitiveness in particular. Nevertheless, it is important to put in perspective this explanation, because the increase of the unit labor cost seems less dangerous than the decrease of capital productivity, which a reversion to the Marxist analysis allows us to better understand.

Un-doing Labour in Greece: Memoranda, Workfare and Eurozone 'Competitiveness'

<p>This article examines the assault on the rights, wages and bargaining position of workers in Greece following the bailout agreements between Greece and its creditors – the European Central Bank, the International Monetary Fund (IMF) and the group of Eurozone countries. It focuses in particular on the workfare measures that are designed to activate the industrial reserve army. These measures are enacted in the name of competitiveness, which is defined as reducing unit labour costs, revealing the neo-liberal orientation of the structural adjustment programme to which Greece is being subjected. The article also puts this into the context of the wider conflict over austerity policies in Greece, which came to a head with the election of the left-wing Syriza party in January 2015 and its recent defeat against the country’s creditors. We argue that this result can only be properly understood if the institutional design and inherent selectivities of the Eurozone are taken into account.</p>

Structural Changes in the Maltese Economy

Since the Great Recession, Malta has registered a more favourable economic performance than most other euro area states. It is difficult to reconcile this track record with the island’s strong dependence on foreign trade. This article will argue that the enhanced performance of the Maltese economy could partly be explained by the pronounced structural changes that characterised it in the years preceding the crisis. This restructuring underpins a number of strong trends observed during recent years, such as the rise in labour participation, the improvement in the current account balance and the strong increase in unit labour costs. This is the first study for Malta since 2004 to utilise macroeconomic data going back further than 1995. DOI: 10.5901/mjss.2015.v6n5p423

¿Por qué cae la participación de los salarios en el ingreso total en México?

This article examines the evolution of the wage share in total income in Mexico during the period 2003-2013 distinguishing between the tradable and non tradable goods sectors. The main stylized fact of the period is that the fall in the wage share is due to an acute reduction of this share in the tradable goods sectors, particularly manufacturing, and not to the performance in the non tradable goods sectors where the wage share is approximately constant. This contrast is attributed to differences between sectors in price formation mechanisms together with contrasting labor productivity trends (fast growth in the tradables sectors and stagnation, with few exceptions, in the non tradables sectors). The article also addresses the paradox of why the rising profitability in the tradable goods sectors has not led to higher rates of capital accumulation and growth in these sectors, a feature that is explained by the evolution of unit labor costs which, despite its absolute reduction in manufacturing, have not significantly fallen relatively to those in the United States due to an even greater fall in the wage share in that countrýs manufacturing industry.

The European Commission’s new NAIRU: Does it deliver?

The non-accelerating inflation rate of unemployment (NAIRU) is a key component of potential output and as such critically affects output gap estimates. In May 2014, the European Commission changed its specification of the NAIRU for several countries and lowered its NAIRU estimates – in the case of Spain from 26.6% to 20.7% for 2015. To test the dependence of the new NAIRU on unemployment versus structural factors, we run counterfactual simulations applying 1SD shocks to actual unemployment and to the structural variable – real unit labour costs. We find that the NAIRU in its new specification is still largely determined by actual unemployment. This calls in question both the interpretation of potential output estimates as barriers to more vigorous inflation-stable economic activity and the accuracy of structural deficit figures.

Export Dynamics Since the Great Trade Collapse: A Cross-Country Analysis

Using a panel model of goods exports for 16 OECD economies, we quantify advanced economies’ export performance since the ‘Great Trade Collapse’ (GTC). We go beyond the traditional determinants of trade to include a variable measuring shifts in the sectoral composition of world trade and split the real exchange rate into its constituent parts to allow for a differential response to unit labour costs and the nominal exchange rate. We find that, a pre-crisis model based on average coefficients explains the recovery in aggregate exports since the GTC well. But at the country level, we do find substantial cross-country variation in export performance.

Real unit labour costs in Eurozone countries: drivers and clusters

We examine the trajectories of the real unit labour costs (RULCs) in a selection of Eurozone economies. Strong asymmetries in the convergence process of the RULCs and its components—real wages, capital intensity, and technology—are uncovered through decomposition and cluster analyses. In the last three decades, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) succeeded in reducing their RULCs by more than their northern partners. With the exception of Ireland, however, technological progress was weak; it was through capital intensification that periphery economies gained efficiency and competitiveness. Cluster heterogeneity, and lack of robustness in cluster composition, is a reflection of the difficulties in achieving real convergence and, by extension, nominal convergence. We conclude by outlining technology as the key convergence factor, and call for a wider strategy in labour market policies, which should be more oriented to promote the sources of productivity growth. JEL Classification numbers F43; F62; O47; O52

Measuring the comprehensive wage effect of changes in unit labor cost

Unit labor cost (ULC) is defined as labor compensation per value added. It captures the cost competitiveness of industries and countries. As labor compensation is wage multiplied by hours worked or number of people employed, it is easy to show that ULC is wage divided by labor productivity. Thus, changes in ULC are often discussed in the context of wage increases and labor productivity. However, a higher wage induces firms to substitute labor with capital, which affects labor productivity. However, the conventional decomposition of changes in ULC dismisses this indirect impact of wage on ULC through labor productivity. We propose an alternative decomposition of the change in ULC with a measure of a comprehensive wage effect, which fully captures its direct as well as indirect impact. It allows us to understand more accurately the role of wage changes in enhancing cost competitiveness. Furthermore, we compare measures of the wage effect under two decompositions, using data from 18 OECD countries over the 1995–2005 period. We find the wage effect to be significantly overestimated under the conventional decomposition. This study looks at ULC for the whole country as well as for two sectors—manufacturing sector and electricity, gas, and water supply sector. JEL Classification: C43, D24, O47, E31

Exploring Price and Non-Price Determinants of Trade Flows in the Largest Euro-Area Countries

Since the mid-2000s price-competitiveness indicators for some euro-area countries have been providing conflicting signals. Against a stability of the producer price (PPI)-based measure, the manufacturing unit labour cost (ULCM)-deflated indicator points to a major competitiveness loss in Italy; we argue that the discrepancy mostly reflects a divergence of ULCM and PPI trends in competitor countries. Owing to the fading representativeness of labour on overall costs, price-based indicators appear to be more appropriate than those based on ULCMs to assess external competitiveness. In Italy ULC-based indicators play a less relevant role relative to price-deflated measures in explaining exports; the opposite holds true for Germany and France, whereas in Spain exports are insensitive to prices. Non-price competitiveness proves important in explaining Italian, German and, in particular, Spanish exports. Imports react to price-competitiveness dynamics only in Italy; considering the participation in global value chains is useful to correctly identify import sensitivity to domestic and foreign demand.