1. Unit labour costs: a meaningless measure of competitiveness for east- central Europe Martin Myant ETUI Brussels Martin Myant

2. It is a bad measure ● ULC=labour productivity/labour costs, ● used by the European Commission as a measure of competitiveness, justify wage reductions, ● only one possible numerical measure, others give different answers, ● problems with measurement and interpretation, ● an inappropriate basis for policy making, ● neither absolute levels nor changes over time are useful. Martin Myant

3. The standard argument ● If wages rise faster than productivity, we would expect prices to rise and competitiveness to fall leading to a balance of payments deficit, ● can devalue, but not in Eurozone, ‘imbalance’ will continue and grow, ● such is a story often told of the root causes of the Eurozone crisis, need to cut wages in ‘deficit’ countries, ● argument shown with picture of relative changes from @2000. Martin Myant

4. de, ei, es, ULCE Martin Myant

5. There is another story ● Roughly corresponds with current accounts… ● but actually current account deficits came after credit inflows, ● construction booms (that leads to higher ULC!), ● cutting wages, leads to lower imports, not higher exports, that reduced/eliminated deficits, ● higher exports from higher wage sectors, ● NB, never look at absolute levels, compare only certain countries, use ULCE, not other measures. Martin Myant

6. Measures of competitiveness ● Bring in other measures ● ULCE, includes non-traded activities, public services, looks inappropriate… ● levels vary between sectors, much higher where share of labour is higher (public sector, construction), so structural change alters it, ● can use ULCM (actually wage costs this time), or export prices (not a consistent measure?), ● these do not move together and ECE looks like worst in Eurozone. Martin Myant

7. Czechia, relative to partners Martin Myant

8. Hungary Martin Myant

9. Poland Martin Myant

10. Slovakia Martin Myant

11. How to explain differences ● Which measure should we believe? Why are they so different? Why the country differences? ● catching up process to @2008, then stagnates, ● catching up by currency movements and wage rises, public/private differences, policy changes with austerity period and currency devaluations, apparently to keep competitiveness, ● not openly stated, but revaluation had been logical element of convergence to EU price levels, ● now compare absolute levels. Martin Myant

12. Labour cost levels, euros 200020082015 cz3.79.29.9 de24.627.932.2 hu3.67.87.5 pl4.27.68.6 ro1.54.25.0 sk2.87.310.0 Martin Myant

13. Such huge differences! ● Huge differences, short-term variations now appear trivial, relative increases in ULC still leaves a huge gap, ● close to differences in productivity, ● so a German worker is x times as productive? bus driver, teacher, production line? we know this is wrong, therefore PPP comparisons, ● per capita GDP cz, ro, 67%, 44% de in 2014, ● but this is not the measure used by policy makers… Martin Myant

14. Explaining the anomoly ● Productivity is measured as low because wages are low, undermining the key assumption behind using ULC as a measure of competitiveness, ● true for public services (ways to allow for this, but essentially cost-based measure in GDP), true for non-traded, transport etc, ● also true for traded manufacturing, Martin Myant

15. What is international trade? ● Assumption of production by firms in one country competing with those from another, still hear this, ● so higher price, from higher ULC, leads customers to switch to another country’s goods, ● reality is MNCs producing in many countries and outsourcing, ● key question is not who do we buy from, but where does (has) MNC locate(d) production, ● follow for two cases, components and finished products. Martin Myant

16. Outsourcing means same work at lower wage… ● German motor-vehicle manufacturer outsources a component (car seat) to Romania. Why? Same quality at lower (much) price, ● appears in ro GDP figures at Romanian, not previous German, price, workers therefore much less productive while doing exactly the same work. Martin Myant

17. Outsourcing and ULC ● Productivity of labour in the outsourcing firm will increase and ULCs are likely to decrease, ● in the host country, nominal ULC is derived from pre-existing domestic price and wage levels, ● wages can increase a long before it becomes more advantageous to produce at home, ● once an MNC has chosen a location, there are (may be) significant costs of moving. Martin Myant

18. VW Skoda ● Wages about one third German level, productivity also much lower, ● but PPP cz about 70%, and Sk productivity on value added about double the cz average, so maybe more productive in cz than de? ● VW world average, 2015, 17.2 vehicles per employee, Germany, 10.9, Skoda, 26.8; deceptive measure? Depends on kinds of activities, unclear comparison? Martin Myant

19. Skoda VW comparison ● Small cars=small profits, use low wage factories for smaller, cheaper cars, choice of MNC, world prices 20% above Sk, de 70% above, so productivity will appear lower for same work. ● profits, vary between years, 2015 Sk 10.9% of turnover before tax (worldwide 7.3% return on sales), labour costs 6.6%, ● so room for higher wages?... extent unclear… Martin Myant

20. Conclusion ● ULC a poor measure, assumptions about international economic relations that are wrong, ● increasing wages not dependent on changes in ULC, plenty of room for manoeuvre, are limits as MNCs can move activities, but not precise, ● can increase wages now, don’t need to wait for productivity to catch up, it never will, because productivity depends on wage levels. Martin Myant