International Comparisons of Manufacturing Unit Labor Costs: Sources, Trends, and New Directions

Unit labor cost (ULC), defined as labor compensation per unit of output, is a widely used measure of international cost competitiveness. ULC trends, however, differ widely across countries and, traditionally, have been explained in terms of underlying movements in productivity, compensation, and exchange rates. This paper attempts to investigate three issues.

First, it examines the availability of ULC, productivity, and compensation data used for assessing international competitiveness. Three major data sources are reviewed: The Conference Board International Labor Comparisons (ILC) program, the OECD Structural Analysis Database (STAN), and the EU KLEMS Growth and Productivity Accounts. For each source, the paper derives and compares measures of manufacturing ULCs for overlapping countries.

Second, using the ILC database, the paper presents ULC trends and levels for detailed manufacturing industries to shed light on variations in industry cost competitiveness. And third, the paper makes a first attempt to adjust unit labor cost measures for product quality differences in export baskets between countries, using unit values of exported products. The exercise reveals that the adjusted unit labor cost in many high-income countries are lower than the original measures, thus suggesting a stronger competitiveness for these countries in the international market as they produce higher quality products vis-à-vis low-income countries.

This working paper is complimentary.