Unit Labour Costs Research Articles

Can Africa compete with China in manufacturing? The role of relative unit labour costs

AbstractThis paper examines sub‐Saharan Africa's (SSA) bilateral trade and cost competitiveness with China. We document an extraordinary imbalance in the structure of bilateral trade in that China overwhelmingly exports manufactured products to SSA and almost exclusively imports primary products in return. Our principal means of assessing the competitiveness of SSA's manufacturing sector vis‐à‐vis China are measures of relative unit labour costs (RULC). We find that African RULCs declined over the 2000s as China's wages rose faster than Chinese productivity while the reverse was true for the SSA countries in our sample. Nevertheless, RULCs vis‐à‐vis China remain very high for many SSA countries. High RULCs along with weaknesses in the business climate suggest that most SSA countries are unlikely to be competitive in labour‐intensive manufacturing any time soon.

A comparative analysis of the level of competitiveness of the South African Clothing and Textile Industry

The aim of the article is to perform a comparative competitor benchmark analysis of the level of competitiveness of the South African clothing and textile industry (CAT industry). The article employs both Revealed Comparative Advantage (RCA) indices and fixed-effect panel data estimates in order to perform an analysis of the level of competitiveness of the South African CAT industry. The study includes export data from 1990-2013 for 18 sample emerging markets. The RCA indices indicate that the South African CAT industry has comparative disadvantages in both the clothing and textile sectors. Asian CAT industries are inclined towards a more dominant comparative advantage when compared to other emerging markets in both the clothing and textile sectors. The indices indicate a large and widening gap between the levels of competitiveness of the South African CAT industry and the CAT industries of sample countries (especially India and China). The fixed-effect panel data estimates suggest that increasing unit labour costs and declining export shares can be viewed as major determinants of the increasing lack of competitiveness of the South African CAT industry. The results of this article point to a mounting crisis in the South African CAT industry, most especially in terms of job losses and declining exports markets. Proper policy responses from the government, industrialist, retailers, labour unions and other stakeholders within the economy (such as banks and development finance institutions) are required.

Performance of the Macroeconomic Imbalance Procedure in light of historical experience in the CEE region

This article applies set of 24 baseline and auxiliary indicators included into the Macroeconomic Imbalance Procedure framework on the conditions of 17 CEE countries to assess their predictive power given the policy pre-determined and optimal thresholds for the period 1991–2014. Our results suggest that the optimal official thresholds might either be excessively too accommodative (public and private, total or external debt levels), overly conservative (current account balance, export market share and nominal unit labour costs), or with less informative value (labour market characteristics) for set of transition economies. Indicators with higher predictive power belong predominantly to the group of external imbalances indicators.

The Political Economy of Real Exchange Rate Behavior: Theory and Empirical Evidence for Developed and Developing Countries, 1960–2010

ABSTRACTEmpirical results of testing the PPP hypothesis have constantly shown that relative prices do not converge to the same level, either in the short or the long run. Therefore, the PPP explanation of the real exchange rate does not provide a reasonable measure of competitiveness at the international level. This article puts forth a different approach based on the works of Ricardo, Marx, Harrod and Shaikh. It argues that the real relative unit labor cost is the main factor explaining the long-run behavior of the real exchange rate. The second section of the article explains the theoretical underpinnings of our approach. The third section analyzes the role of the real interest rate differential in explaining real exchange rate misalignments. In the fourth section, we present a graphical analysis of the interrelation among the real effective exchange rate, the real unit labor cost ratio, the short-run real interest rate differential and the trade balance for 16 OECD countries, Taiwan and three developing countries for the period 1960–2010. The fifth section investigates the long-run relationship between the latter three indexes through co-integrating and error correction models using the ARDL–ECM framework. The last section provides our conclusions.

Is the wage rate the real anchor of the inflation targeting monetary policy framework?

Numerous central banks (cbs) focus on controlling the nominal interest rate (i) to sway the price level and meet the inflation target (πo) nowadays (Taylor, 1993; Bernanke et al., 1999; Woodford, 2003). The i is taken to be the anchor for a low and stable rate of inflation in an open economy model. Yet, some analysts, orthodox and heterodox alike, have challenged this belief arguing that cbs turn to the exchange rate (e) channel and adopt it as a second policy tool with the aim of meeting πo (Svensson, 1999; Hüfner, 2004). The purpose of this paper is to show that the veritable anchor of inflation is neither i nor e, but the wage rate and the unit labour costs (ulc). We conduct econometric analyses based on data from a set of inflation targeting countries. The main empirical findings support our hypothesis regarding the higher importance of wages and the ulcvis-à-vis i and e in the determination of the cpi.

Spatial Disparities in Unit Labour Costs in Food Products Manufacturing Sector

In case of agricultural economics, an economic growth is most generally understood as long-term process of increasing agricultural production. Especially in neoclassical theory, it is determined mainly by labour productivity. According to the producer’s equilibrium theory the remuneration of labour factor should result from its productivity. If labour remuneration is greater than its productivity, the allocation can be considered as ineffective. Hence, the resulting difference should be financed from other sources. If such a situation occurs in a whole sector, then the producers benefit from the distribution of the value in the economy. The aim of this research is to examine spatial diversity of the ULC (unit labour costs) in EU’s food products manufacturing sector. Defining the ULC as a ratio of the labour remuneration to its productivity, the paper used Moran’s I statistic for identifying the spatial association. For 2008-2014 the study used information from EUROSTAT database.

Determinants of Net Exports in Polish and Czech Manufacturing: A Sectoral Approach with Error Correction Model

Research background: Growth model in CEE countries has based on a massive inflow of direct foreign investments, especially in manufacturing, from the onset of the transformation. This resulted in a substantial share of manufacturing goods in total exports and a high ranking position of some CEE countries among the most industrialized economies in the world. Purpose of the article: The main objective of this paper is to compare the determinants of the international competitiveness, measured by the net exports of the manufacturing sectors in the Czech and Polish economies, by using the database of 13 manufacturing sub-sectors in 1995-2011. The authors research the question of how much foreign and domestic demand, the level of labour costs, the level of sector innovation intensity, the level of sector openness to foreign markets as well as sectoral labour productivity influence the changes in trade balance. Methodology/methods: Our approach is based on employing an error correction model and SURE model to disaggregated sectoral manufacturing data. Findings & Value added: The results of the analysis conducted show substantial differences in the roles particular variables play in explaining the net exports in individual sectors. For the majority of Polish and Czech manufacturing sub-sectors, generation of positive trade balance is determined by relative demand growth. An increasing labour productivity influences heavily a positive trade balance of Polish goods in majority of sub-sectors, however, a key factor in Czech sub-sectors is decreasing unit labour costs. The results of the analysis indicate mostly a greater impact of the researched factors on net exports in long rather than short term and the better capacity of the Czech economy to correct deviations from the equilibrium.

Can Cheetah Beat Tiger? A Comparative Analysis of Chinese Industrial Competitiveness with Sub-Saharan African Countries

This paper examines Sub-Saharan Africa’s industrial competitiveness with China, by employing a statistical methodology for studying competitiveness based on relative unit labour costs. The patterns of bilateral trade between China and SSA, as well as investment and financial aspects of the relationships are examined. The findings show that SSA’s relative unit cost levels have generally been higher than that of China. However, in the 2000s, the levels dropped as China’s wages increased faster than its productivity, while the reverse is true for SSA countries in the study sample. The study shows that SSA countries are unlikely to be competitive in labour-intensive manufacturing because of high relative unit labour costs and weaknesses in their business climate.

Cross‐Country Spillovers from Fiscal Consolidations

AbstractIn the aftermath of the global financial crisis, many OECD countries adopted fiscal consolidation strategies to reduce their debt‐to‐GDP ratios. This paper investigates the effects of fiscal consolidation on trading partners’ growth through trade linkages. Using a measure of exogenous fiscal shocks in export markets, fiscal consolidation spillovers are found to slow down domestic growth and decrease employment. To the extent that fiscal consolidations are synchronised, fiscal policies have large spillover effects on output. Spillovers of fiscal consolidations on growth are found to be initially larger between countries belonging to currency unions, though this larger impact vanishes over the medium term. Larger spillovers of fiscal consolidation coincide with lower bilateral exports, higher bilateral imports and relative increases in unit labour costs in currency unions. Spillovers of fiscal consolidation are also found to be more detrimental to domestic growth during economic downturns in export markets.

Determinants of Inflation Differentials in the Euro Area: Is the New Keynesian Phillips Curve Enough?

In the euro area, inflation rates diverged after the creation of the single currency, and started to converge again from mid-2002. It is against this background that the paper studies the determinants of inflation differentials in the euro area. We start by using the New Keynesian Phillips Curve (NKPC) to explain inflation differences for a panel of countries. Exchange rate movements and expected inflation in particular play an important part in bringing about diverging inflation dynamics, while lagged inflation does not. The Incomplete Competition Model (ICM) adds explanatory power to the NKPC in describing inflation dynamics across countries. The latter model does not encompass ICM, and the variables proposed by the ICM are statistically significant: the growth in nominal Unit Labour Cost and the long-run disequilibrium between prices and costs explain inflation differentials.

Ten Lessons from a Decade of Debating an EUBS: Robust Findings, Popular Myths and Remaining Dilemmas

The modern debate on a potential EUBS began in earnest around a decade ago, just prior to the onset of the global financial crisis. In the mid-2000s, current account imbalances and diverging unit labour costs triggered a new debate about transfer systems between euro area countries and, particularly, a European unemployment insurance.

Effect of the touristic product prices and costs on the international competitiveness: a comparative panel data analysis

Purpose- Tourism is an important sector for countries across the world which develops the fastests and contributes to country's economy. The countries in the tourism market are in a serious competition due to its contribution to the economic development. Therefore are countries increasing their international competitiveness by the price and cost advantage of the touristic products they offer in order to obtain a greater share of the international tourism market. Methodology- In the study are the effects of the price and cost advantages on the tourism incomes determined by utilizing the data of 31 European stakeholder countries in the tourism sector for 2000-2014. The harmonized index of consumer prices, representing the price and cost advantage and established by the European Commission’s (EC) Economic and Financial Affairs Council (ECOFIN) with 5 indicators based on the real effective Exchange rate, and the unit labour cost series are utilized. Findings- The co-integration and causality relation between these series and the tourism income series of the current period are examined by the Kao (1999) panel co-integration and the Dumitrescu and Hurlin (2012) panel causality analysis. Conclusion- As a result of the conducted analysis, it is determined that there is a co-integration between the price-cost advantage and the tourism revenues, and that the price-cost advantage is a statistically meaningful reason for the tourism revenues.

The diversity of wage regimes: why the Eurozone is too heterogeneous for the Euro

Why did the transnational synchronization of wage inflations fail during the first 10 years of the euro? We analyze data from 1999 to 2008 for 12 euro members and estimate increases of nominal unit labor costs both in the overall economy and in manufacturing as dependent variables. While our analysis confirms that differences in economic growth shaped the inflation of labor costs, we add a political-institutional argument to the debate and argue that the designs of the wage regimes had an additional, independent impact. In coordinated labor regimes, increases in nominal unit labor costs tended to fall below the European Central Bank’s inflation target, while in uncoordinated labor regimes, the respective increases tended to exceed the European inflation target. Due to the stickiness of wage-bargaining institutions, the lack of the capacity to synchronize inflation is not likely to disappear in the foreseeable future.

Determinants of Chinese direct investments in the European Union

ABSTRACTThis article analyses the determinants of Chinese foreign direct investment (FDI) activities in the European Union (EU). Evidence is based on panel Poisson models drawing on two investment monitors at the individual project level. Greenfield investments (GI) and mergers and acquisitions (M&A) are distinguished. The findings indicate that market size and bilateral trade are the main factors for Chinese investment in the EU. In contrast, business-friendly institutions do not foster FDI. Probably, Chinese investors are risk averse, and prefer regions with less competitive markets. The striking difference between GIs and M&As is related to unit labour costs. Higher costs make the host country less attractive for the establishment of new firms, but do not affect the involvement in existing firms. The sectoral dispersion of Chinese FDI in the EU did not change much since the global financial crisis. Most relevant shifts have occurred in research and development (R&D), where low-income EU countries have become increasingly attractive.

Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks

We investigate changes in the time series characteristics of postwar U.S. inflation. We model the conditional mean of inflation with a long memory autoregressive fractionally integrated moving average model allowing for stochastic volatility in the conditional vari- ance of the process. We apply exact maximum likelihood to monthly data to get efficient estimates of the parameters in subsamples of varying size. By this newly developed model and estimation technique we find remarkable changes in the variance, in the order of in- tegration, in the short memory characteristics and in the volatility of volatility. Monetary authorities, financial institutions, pension funds and private investors demand re- alistic statistical models for inflation to assess the real value of wealth, income and returns, both in the short run and in the long run. In this paper we develop a new exact maximum likelihood method to investigate the statistical properties of an inflation process with long memory and stochastic volatility. It is well established that the statistical properties of postwar U.S. inflation underwent a number of structural breaks. There are many ways to explain persistent changes in the mean, variance and autocorrelation of U.S. inflation. The changes in the time series properties of inflation may be due to changing monetary policies (short run direct price controls in the 1950s and 1970s, long run indirect inflation controls starting in the 1980s) or to changes in the process generating price shocks. Many types of shocks have been investigated, we mention technological progress, unemployment changes, output gap disturbances, fluctuations in real unit labour costs as in Gal´o and Gertler (1999), oil price shocks, as in Hooker (1999), changes in the sectoral distribution of price changes as in Ball and Mankiw (1995), trade unions as in Bowdler and Nunziata (2007), and exchange rate pass-through as in Campa and Goldberg

Macroeconomic imbalances and business cycle synchronization. Why common economic governance is imperative for the Eurozone

This paper investigates a new category of influential factors on business cycle synchronization (BCS), so far hardly regarded in the BCS literature. It provides an empirical assessment of the impact of macroeconomic imbalances, as monitored by the European Commission by the scoreboard indicators since 2011, on BCS in the Euozone. We use a quarterly data set covering the period 2002–2012 and estimate the direct and indirect effects of macroeconomic imbalances in the pre- and post-crisis period in a simultaneous equations model. Business cycle correlation between EA members is measured by the recently proposed dynamic conditional correlation of Engle (2002) which can better identify synchronous and asynchronous behaviour of BC than the commonly used measures. We find that appearing differences between EA members in current account, in government deficit and public debt, in private debt and unit labor cost developments have reduced BCS in the EA, even more in the post-crisis period than before. Moreover, these explanatory factors of BCS, generally reinforce each other and are also influenced by other critical macro imbalances. Since BCS is essential in a monetary union, this paper provides clear support that a stronger, common economic governance would be important for the functioning and survival of the Eurozone.

Inflation in Argentina during the 2000s

ABSTRACTThe paper presents a neo-structuralist econometric analysis of the monthly inflation rates. The model breaks down the CPI into different components based on their price-formation mechanisms. The basic breakdown defines three components: PFLEX (fruits and vegetables, 3.6% of the basket), PREGUL (prices regulated by the government, 20.1% of the basket) and PFIX (the rest of goods and services, 76.3% of the basket). PFIX is the focus of the econometric analysis while PFLEX and PREGUL are considered exogenous. The explanatory variables are the monthly rates of: the price of bovine cattle at the domestic market, the international soy price, the price by ton of imported intermediate goods, the nominal exchange rate, the average wage of workers that are registered in Social Security and the productivity, measured by the GDP by employed worker. There was an informal indexation mechanism in the labor market. Average monthly wages rose at annual rates that were almost always higher than the sum of past annual inflation plus the annual increase in productivity. The over-indexation of the unit labor cost was the main inflationary factor in the period. The inertial component, represented in the model by the previous monthly rate, determines 60% of the current rate.

Labour Costs and External Competitiveness of the Andalusian Economy (2007-2014)

The aim of this paper is to analyse the evolution of Andalusian economy’s external competitiveness. For that purpose, two main research dimensions are examined: first, the relationship between unit labour costs and Andalusia’s export performance at an aggregate level; second, indicators of both business, and public sector behaviour in the determinant areas of the regional competitive position at a microeconomic level. The analysis of the evolution of the variables in the economy will be carried out in comparison with several surrounding economies and regions. The results suggest that despite the strong downward trend followed by labour costs, at the moment, the crisis has not become an opportunity to substantially improve the positioning of the regional economy.

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Patterns of Convergence (Divergence) in the Euro Area: Profitability Versus Cost and Price Indicators

We analyse patterns of convergence (divergence) across euro-area countries in manufacturing since monetary union and find that not only costs, but also profitability have followed divergent paths. We further find that profitability developments only partially overlap with those of unit labour costs and producer prices, more extensively studied in the literature. Considering the largest countries, profitability in manufacturing in Germany and Spain has risen by comparison with non-tradables and with respect to France and Italy, where profit margins in manufacturing have declined and have lost ground with respect to the non-tradable sector. We show that these developments are correlated to the relative export performance of these countries. This correlation also holds in a two digit sector-level panel analysis, comprising all the euro-area countries that first entered the monetary union. This is consistent with the recent international trade literature, according to which successful exporting firms, which are more efficient or produce better products, also charge higher mark-ups. Turning to Italy, after a protracted decline both export shares and profit margins in manufacturing have improved in recent years, which is consistent with a recovery in external competitiveness.