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Measuring the comprehensive wage effect of changes in unit labor cost

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  • Hideyuki Mizobuchi

Abstract

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 Copyright Mizobuchi. 2015

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  • Hideyuki Mizobuchi, 2015. "Measuring the comprehensive wage effect of changes in unit labor cost," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 4(1), pages 1-12, December.
    • Handle: RePEc:spr:jecstr:v:4:y:2015:i:1:p:1-12:10.1186/s40008-015-0017-4
    DOI: 10.1186/s40008-015-0017-4
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    References listed on IDEAS

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    1. Hideyuki Mizobuchi, 2014. "Returns to scale effect in labour productivity growth," Journal of Productivity Analysis, Springer, vol. 42(3), pages 293-304, December.
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    7. Sbordone, Argia M., 2002. "Prices and unit labor costs: a new test of price stickiness," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 265-292, March.
    8. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    9. Ark, Bart van & Stuivenwold, Edwin & Ypma, Gerard, 2005. "Unit labour costs, productivity and international competitiveness," GGDC Research Memorandum 200580, Groningen Growth and Development Centre, University of Groningen.
    10. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity," Econometrica, Econometric Society, vol. 50(6), pages 1393-1414, November.
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    1. Shunsuke Managi & George Halkos, 2015. "Production analysis in environmental, resource, and infrastructure evaluation," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 4(1), pages 1-4, December.

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    More about this item

    Keywords

    Unit labor cost; Malmquist index; Index number; Manufacturing sector; Energy sector;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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