Monday, 28 July 2014

Competitiveness, unit labour costs, and the class struggle

It's hard to spend much time reading about the Eurozone crisis without coming across the term "unit labour costs" (ULC).  There's a common narrative (see this post) that says that the Eurozone peripheral countries let their ULCs get out of control before the crisis, losing competitiveness, and now they have to get those costs back down.  For instance, here's Mario Draghi earlier this year:
...most of the stressed euro area countries have made remarkable progress in gaining competitiveness. Over the past five years, the cumulative unit labour cost differential vis-à-vis the euro area have fallen by more than 20 percentage points in Ireland, around 15 percentage points in Greece and Spain, and almost 10 percentage points in Portugal. This was accompanied by substantial improvements in the export dynamics of these countries.
This narrative is illustrated with charts like this one:

However, there's somewhat more to this than meets the eye. Unit labour costs are a unitless ratio--the share of labour compensation (including non-wage costs) in total value added in the economy, also known as GDP.  What's compared on this chart is actually something known as nominal unit labour costs (NULC; all this is explained in this paper, which I wasn't sure I believed at first, but I've checked against the official definition from Eurostat, confirmed that the calculation is done as I describe below, and that the numbers the ECB reports as unit labour costs are these same ones) that are meant to have a monetary significance.  Here's the formula for calculating nominal unit labour costs, with some algebra done
NULC = (labour compensation/GDP) * price index * correction for self-employment 
For simplicity's sake, let's ignore the last term, and call the first term "labour's portion," meaning the portion of value-added that goes to labour, rather than profits. So the formula becomes
NULC = labour's portion * price index
In the presence of inflation, all a rising NULC means labour's portion is not falling as fast as inflation is rising.  It does not necessarily mean that wage gains are outstripping inflation, productivity, or anything like that.  The chart below is based on exactly the same underlying data as the first chart (including the same correction for self-employment), but without the effects of inflation.
Source; I assumed no change from 1999-2000 in Greece due to missing data.
Note how different this chart looks from the previous one! In the run-up to the crisis, there was absolutely no general redistribution to employees in the PIIGS. As of 2007, in fact, in all of them save Ireland, employees were getting a smaller portion of value-added than in 2000. Wage restriction in Spain was almost identical to that in Germany.  (The spike in Ireland in 2008-2009 is largely due to the rapid fall in GDP, with compensation growth falling more slowly; I take it that GDP is generally a weird number for Ireland due to domiciling issues, so that might have something to do with it as well.)

So, the differences in NULC reflect to some extent slower redistribution of value-added away from employees in Portugal, Italy, Ireland, and Greece than in Germany, but mostly national differences in inflation. And at a first glance, it's hard to make the case that these national differences in inflation themselves stem from excessive worker bargaining power outside of Germany. I'm still a neophyte in working with these figures, but this seems to me to be a problem for the position often taken by political scientists that NULC outcomes reflect institutional differences across the Eurozone.  For instance, Peter Hall claims that "industrial relations institutions promote the co-ordinated wage bargaining that can be used to hold down labour costs."  

In any event, the NULC these days has become the de facto operationalisation of "competitiveness" for the ECB and dominant elite Eurozone opinion. On this definition, "become more competitive" translates into "labour should be receiving a smaller portion of value-added." Promotion of competitiveness has become class struggle (or distributional struggle, if you prefer) by another name. Promotion of competitiveness so defined is also identical to suppression of domestic demand, worsening the problem of the Eurozone's missing demand model

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