# Unit labor costs

As labor costs ( LSK ) on a specific be power unit attributable labor costs designated d. H. the personnel-related manufacturing costs per piece produced. Unit labor costs are used in both business and economics as an indicator to assess the competitiveness of the cost of labor in a company or in an economy.

## Calculation of unit labor costs

To calculate unit labor costs, the labor costs per unit of work are set in relation to the productivity per unit of work.

General formula: ${\ displaystyle LSK = {\ frac {\ text {Labor costs}} {\ text {Performance (productivity)}}}}$

The unit labor costs can be calculated both per employee (employed person) and per hour. In the above equation, only the numerator and denominator need to indicate the quantities per hour instead of per capita. Increasing labor productivity with constant labor costs therefore leads to falling unit labor costs. The same applies to falling wages with constant labor productivity. Declining labor productivity, on the other hand, like rising wages, leads to higher unit labor costs.

A change in unit labor costs affects the labor market when labor costs rise or fall more than the cost of capital and therefore labor is replaced by manufacturing machines or vice versa. Regional distortions occur when the ratio of labor costs to real or nominal productivity increases more or less at one location than at a competing location.

## Unit labor costs as an economic indicator

In national accounts , unit labor costs are calculated as the quotient of compensation of employees and gross domestic product (GDP). If one uses the real GDP (so-called price-adjusted GDP), then one obtains the nominal unit labor costs , which should provide information about the pressure that labor costs exert on the price level. On the other hand, if you use nominal GDP (GDP at current prices), you get real unit labor costs . This indicator shows the actual load on the manufacturer, i.e. H. what proportion of the wage increase the company cannot compensate by increasing labor productivity or the selling price. At the same time, real unit labor costs measure the share of compensation of employees in GDP ( wage share ).

${\ displaystyle LSK _ {\ text {real}} = {\ frac {\ text {Employee compensation}} {\ text {nominal GDP}}}}$
${\ displaystyle LSK _ {\ text {nominal}} = {\ frac {\ text {Employee remuneration}} {\ text {real GDP}}}}$

The Deutsche Bundesbank publishes indices on unit wage costs for various branches of industry; currently, unit wage costs from 2010 correspond to the value 100, with wage costs being represented by employee compensation per employee hour and labor productivity being calculated as gross value added at previous year's prices per hour worked (nominal unit wage costs). For the economy as a whole, the Deutsche Bundesbank determines wage costs per product unit (this would correspond to the nominal unit wage costs) and per sales unit (real unit wage costs). The Bundesbank defines these indices as the quotient of the numerator index of employee remuneration per employee hour and the denominator of the index of gross domestic product in previous year's prices per hour of employment or, in the second case, the index of nominal gross domestic product per hour of employment. In general, the former increases more than the latter because the nominal gross domestic product usually rises faster than the price-adjusted gross domestic product due to price changes. According to the Deutsche Bundesbank, the wage costs per product unit increased from 2010 = 100 to around 109 in 2015, while they were again around 100 per sales unit at 2010 = 100 in 2015.

## Labor costs vs. Labor costs

Labor costs are the total personnel expenses or costs in a company. They are made up of gross wages and salaries and statutory and voluntary social benefits, surcharges, etc. together. Wage costs (gross wages) together with salaries and ancillary wage costs make up the total personnel costs. Workers get wages and white-collar workers get wages. The labor costs therefore include the salaries and the wage costs do not include the salaries. Unit labor costs can be calculated using both labor costs and wage costs. In the national accounts (VGR), the unit labor costs are also calculated with the employee remuneration per dependent employee. The wages and salaries of employees in the national accounts consist of gross wages and salaries and employers' social contributions. For the informative value of the unit labor costs, it is necessary to look carefully at which components the costs are made up of and what exactly is being considered. If the unit labor costs are to be compared economically, the labor costs ( compensation of employees ) are set in relation to production ( gross domestic product , nominal or price-adjusted). If the unit labor costs are viewed from a business point of view to assess the competitiveness of a company, the labor costs that have been expended for a product (service) are determined.

## Adjustment of real unit labor costs

Similar to the wage share, an adjustment can also be made to real unit labor costs in order to deduct shifts between employees and self-employed (including family workers ) in the number of gainfully employed persons . The real unit labor costs are then calculated as follows:

${\ displaystyle LSK _ {\ text {real}} = {\ frac {\ text {Employee remuneration per employee}} {\ text {nominal GDP per employee}}}}$

The real unit labor costs for different countries are calculated in the ameco database of the European Commission .

Development of real unit labor costs in Germany, Japan and the USA since 1960
Development of unit labor costs (net wages and salaries plus employee and employer social contributions and wage taxes) in relation to gross national income (GNI) in Germany, France, Great Britain, Italy and Spain

## Unit labor costs as a business indicator

In order to calculate the unit labor costs in a company, the sum of the employee wages that are attributable to the manufacture of a product or service is divided by the number of units manufactured. Unit labor costs can be determined for individual products or the entire company using this formula.

${\ displaystyle LSK = {\ frac {\ frac {\ text {Total employee remuneration}} {\ text {Number of employees}}} {\ frac {\ text {Production}} {\ text {Number of employees}}}} }$

A company can achieve lower unit labor costs both by lowering labor costs and by increasing productivity. In order to lower their wages, many companies have relocated production sites to low-wage countries as part of the globalization of sales markets and production. This focus on direct wage costs failed to recognize that production at a location with that well-trained workforce and that good infrastructure, which is usually associated with a high wage level, brings indirect advantages. Due to the high flexibility and quality guaranteed there, companies can enforce higher market prices and in this way increase the margin between production costs and sales price. In addition, manufacturers who develop and manufacture products in the target market can work faster and more customer-oriented. Because these relationships received little attention, only a quarter of company relocations abroad are successful.

## Development of unit labor costs

Development of unit labor costs in Germany and average abroad (from 1991 to 2014, 1991 corresponds to 100)

The following section looks at the development of unit labor costs from 1991 to 2014. The influencing variables (see figure) for 1991 are set equal to one hundred.

The entire investigation period is divided into four phases:

1. At the beginning of the 1990s, unit labor costs rose more sharply in Germany than abroad. German unit labor costs rose by 16 percent up to 1996, while abroad they remained more or less constant on a national currency basis.
2. In the period from 1996 to 2001, German unit labor costs fell slightly, while abroad they continued to show little movement in domestic currency.
3. From 2001 to 2007, unit labor costs abroad fell on a national currency basis. On a euro basis, however, a significant decrease in unit labor costs of around 20 percent can be seen.
4. The global economic crisis had a stronger influence on the development of unit labor costs in Germany than abroad: In the period from 2007 to 2009, unit labor costs in Germany rose by around 30 percent. On average for the other countries, they increased by 11 percent on a national currency basis. In 2010 and 2011, the decline in unit labor costs, at 17 percent in total, was significantly more pronounced in Germany than abroad, at just under 6 percent.

## Unit labor cost index in an international comparison (1991 = 100)

International comparison of unit labor cost levels for the manufacturing sector

In an international comparison of unit labor cost levels for the manufacturing sector with other major economies, based on exchange rates and prices from 2013, Germany ranks fourth behind the United Kingdom, Italy and Norway, according to the Institute of German Economy . On average, the unit wage cost level is 10 percent lower than that of Germany compared to the other countries (mean value of the countries excluding Germany; weighted with their share in world exports in the period 2011 to 2013).

In the United Kingdom and Italy, unit labor costs in manufacturing are 19 and 11 percent higher, respectively, than in Germany. In France they are almost at the German level. This means that the three largest European manufacturing economies after Germany have approximately the same or significantly higher unit labor costs.

The USA has significantly lower unit labor costs in manufacturing with a unit wage cost level of 77 percent compared to Germany. This is due to both higher productivity and significantly lower labor costs.

## criticism

### Expressiveness

The informative value of comparative studies on unit labor costs is limited. On the one hand, unit labor costs can be low due to capital-intensive production processes . On the other hand, only the work performed by the employees is included in the unit wage costs, while the inputs from other companies can be disregarded. There are also different unit labor costs for different industries. Unit labor costs in manufacturing differ from those in the economy as a whole. In addition, differences can arise in the calculation of nominal unit labor costs, which depend on whether calculations are based on the national currency or in a single currency. On the other hand, it has no influence on real unit labor costs whether the numerator (employee remuneration) and denominator (gross domestic product) are expressed in national currency or in US dollars, for example.

### Influence of the exchange rate on nominal unit labor costs

One factor influencing the calculation of unit labor costs is labor costs. In an international comparison, these wage costs are subject to the influence of exchange rates. In order for the wage costs and thus also the unit labor costs to be comparable, the wage costs must be converted to a uniform currency. The current exchange rate must be used for the calculation, because the exchange rate is subject to constant fluctuations. The comparability of wage costs in different years is limited. The following example should clarify this:

Exchange rate from 2015 of 1 USD = 0.9433 € and an exchange rate from 2006 of 1 USD = 0.7964 €

If one were to convert the US wage costs in 2006 of USD 54,737 per employee not at the 2006 exchange rate but at the 2015 exchange rate, then the US labor costs would not amount to € 43,595 but to € 51,633. A corresponding adjustment would also have to be made for the reference value, e.g. the gross domestic product. In the case of real unit labor costs - labor costs in relation to nominal gross domestic product - the effects of the exchange rate in the numerator and denominator of the unit labor costs offset each other.

The internal comparison of the absolute level of wage costs is characterized by the level and change in exchange rates. As a result, the labor costs of countries in the appreciating trend are higher than the labor costs of countries in the devaluation trend.

## literature

• Bontrup, Heinz-J .: Wages and Profits: Economics and Business Basics. 2nd edition, Oldenbourg, Munich 2008, ISBN 978-3-486-58472-1 .
• Hartmut Görgens: Are wages too high in Germany? Numbers, facts, arguments. Metropolis-Verlag, Marburg 2007, ISBN 978-3-89518-636-3 .

## Individual evidence

1. ^ Lesch, Hagen: European Monetary Union and Wage Policy. In: Ten Years of the Euro: Experiences, Successes and Challenges , IW Analyzes No. 43, 2008, Dt. Inst.-Verl., Cologne, ISBN 978-3-602-14820-2 , p. 89.
2. Wisdorff, Flora: Unit labor costs evaluate productivity . In: Die Welt - Wirtschaftslexikon , January 6, 2010 4:20 pm, accessed April 8, 2015.
3. ^ Bontrup, Heinz-J .: "Wages and Profit: Economics and Business Basics", 2nd edition, 2008, Oldenbourg, Munich, ISBN 978-3-486-58472-1 , p. 162.
4. Nielen, Sebastian; Schiersch, Alexander: Too much temporary work increases unit labor costs . In: DIW weekly report No. 28/2011. P. 10.
5. Gabler Wirtschaftslexikon: wage quota definition of wage quota
6. See Deutsche Bundesbank Eurosystem, Seasonally Adjusted Economic Figures, Statistical Supplements 4 to the Monthly Report.
7. Seasonally adjusted economic figures , January 2016, p. 24f.
8. Gabler Wirtschaftslexikon: Labor Costs Definition of Labor Costs
9. Gabler Wirtschaftslexikon: Labor costs definition of labor costs
10. ^ Bontrup, Heinz-J .: "Wages and Profits: Economics and Business Basics", 2nd edition, 2008, Oldenbourg, Munich, ISBN 978-3-486-58472-1 , p. 552.
11. Own calculation based on the ameco database
12. Görgens, Hartmut: Are the wages in Germany too high ?: Numbers, facts, arguments. Metropolis, Marburg 2007.
13. Meyer, Tobias; Closer, Ulrich: So that the location becomes a success factor. In: VDI-Nachrichten No. 9/2006. P. 15.
14. Graphic: Own design based on data from IW Cologne
15. IW Trends - quarterly journal on empirical economic research from the Institute of the German Economy in Cologne, 41st volume, issue 4/2014; .
16. Own design based on data from IW Cologne. Notes by the IW: Based on 2013 exchange rates and prices. Sources: Deutsche Bundesbank; Eurostat; national sources; OECD; Federal Office of Statistics; US Department of Labor; Institute of the German Economy Cologne
17. Schröder, Christoph: Productivity and Unit Labor Costs in Industry in International Comparison In: IW Trends - Quarterly journal on empirical economic research from the Institute of the German Economy in Cologne, Volume 41, Issue 4/2014; .
18. Hartmut Görgens: Are the wages in Germany too high? , Metropolis, Marburg 2007, ISBN 978-3-89518-636-3 , pp. 188f.
19. Hartmut Görgens: Are the wages in Germany too high? , Metropolis, Marburg 2007, ISBN 978-3-89518-636-3 , p. 191.
20. Schröder, Christoph: Productivity and Unit Labor Costs in International Comparison In: IW Trends - Quarterly journal on empirical economic research from the Cologne Institute for Economic Research , Volume 32, Issue 3/2005, p. 3, .
21. Görgens, Hartmut: Are the wages in Germany too high ?: Numbers, facts, arguments. Metropolis, Marburg 2007, ISBN 978-3-89518-636-3 , pp. 137-138.