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Unit Labor Costs in the Eurozone: The Competitiveness Debate Again

Author

Listed:
  • Jesus Felipe
  • Utsav Kumar
Abstract
Current discussions about the need to reduce unit labor costs (especially through a significant reduction in nominal wages) in some countries of the eurozone (in particular, Greece, Ireland, Italy, Portugal, and Spain) to exit the crisis may not be a panacea. First, historically, there is no relationship between the growth of unit labor costs and the growth of output. This is a well-established empirical result, known in the literature as Kaldor's paradox. Second, construction of unit labor costs using aggregate data (standard practice) is potentially misleading. Unit labor costs calculated with aggregate data are not just a weighted average of the firms' unit labor costs. Third, aggregate unit labor costs reflect the distribution of income between wages and profits. This has implications for aggregate demand that have been neglected. Of the 12 countries studied, the labor share increased in one (Greece), declined in nine, and remained constant in two. We speculate that this is the result of the nontradable sectors gaining share in the overall economy. Also, we construct a measure of competitiveness called unit capital costs as the ratio of the nominal profit rate to capital productivity. This has increased in all 12 countries. We conclude that a large reduction in nominal wages will not solve the problem that some countries of the eurozone face. If this is done, firms should also acknowledge that unit capital costs have increased significantly and thus also share the adjustment cost. Barring solutions such as an exit from the euro, the solution is to allow fiscal policy to play a larger role in the eurozone, and to make efforts to upgrade the export basket to improve competitiveness with more advanced countries. This is a long-term solution that will not be painless, but one that does not require a reduction in nominal wages.

Suggested Citation

  • Jesus Felipe & Utsav Kumar, 2011. "Unit Labor Costs in the Eurozone: The Competitiveness Debate Again," Economics Working Paper Archive wp_651, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_651
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    References listed on IDEAS

    as
    1. Giorgio Rampa & Luciano Stella & A. P. Thirlwall (ed.), 1998. "Economic Dynamics, Trade and Growth," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-26931-0, March.
    2. Luca Benedictis, 1998. "Cumulative Causation, Harrod’s Trade Multiplier, and Kaldor’s Paradox: The Foundations of Post-Keynesian Theory of Growth Differentials," Palgrave Macmillan Books, in: Giorgio Rampa & Luciano Stella & A. P. Thirlwall (ed.), Economic Dynamics, Trade and Growth, chapter 8, pages 252-280, Palgrave Macmillan.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Competitiveness; Eurozone; Income Distribution; Unit Labor Costs;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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