A new sectoral unit labour cost indicator based on global value chains

ABSTRACT

We propose ‘embodied unit labour costs’ (EULC) at the country-sector level as a new cost-related competitiveness indicator. EULC are more comprehensive than standard unit labour cost measures as they incorporate unit labour costs of all domestic and foreign sectors contributing to the final goods production of a specific sector. The contribution is expressed in value-added terms and takes global supply chains into account. Using the World Input-Output Database (WIOD) the concept is illustrated by evaluating the cost competitiveness of German industries.

KEYWORDS:

• Unit labour costs
• global supply chains
• input-output analysis
• sectoral analysis
• international competitiveness
• WIOD
• Germany

JEL CLASSIFICATION:

• J30
• C67
• E01
• F16
• F23

Acknowldgements

We are grateful for valuable comments and suggestions to the anonymous referee and to Volker Grossmann, Willi Kohler and the participants of the following conferences: China Meeting of the Econometric Society 2018 in Shanghai, Asian and Australasian Society of Labor Economics (AASLE) Conference 2018 in Seoul, European Trade Study Group (ETSG) Conference 2018 in Warsaw, ESCoE Conference on Economic Measurement 2019 in London and the Asian Meeting of the Econometric Society 2019 in Xiamen. We declare that we have no relevant or material financial interests that relate to the research described in this paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental data

Supplemental data for this article can be accessed here.

Notes

¹ For the latter see: https://www.ecb.europa.eu/stats/balance_of_payments_and_external/hci/html/index.en.html.

² Different price- and cost-related competitiveness indicators are, for example, compared in Ca’Zorzi and Schnatz (2007), Christodoulopoulou and Tkaˇcevs (2014) and Fischer, Hossfeld, and Radeck (2016). These studies usually conclude that no competitiveness indicator clearly outperforms the other.

³ The literature on global value chains is growing, see, e.g. Koopman, Wang, and Wei (2014), Blyde (2014) and Johnson and Noguera (2017).

⁴ Examples for ICIO databases are the Global Trade Analysis Project (GTAP) and the WIOD.

⁵ It is assumed that in all countries a sectoral aggregate consists of the same individual sectors.

⁶ For each component the weights of the contributing sectors are modified so that they sum up to one. This eliminates the effect of changing importance of each component on total EULC.