http://unstats.un.org/unsd/nationalaccount/docs/1993sna.pdfIt has taken me some time and some reading to get to grips with the concept of ULC as it applies to countries. It is becoming a familiar experience to start reading about some of this stuff and to have the thought: it can't be a stupid as that. And maybe it isn't. If it isn't then perhaps someone can show me where I have gone wrong.
As noted above the ULC of a firm which produces medium sized dry goods is a fairly simple calculation and it does have some obvious use. It is not a measure of competitiveness even there, but it does have a nodding acquaintance with it. Economists seem to think that is enough and they blithely say
certeris paribus and move swiftly on as if that made sense. Business men do not say that: if they make and sell better pencils at a higher price and at higher cost they know that not all else is equal and they are not so foolish as to pretend that it is.
At the level of business, if two firms are producing the same thing on the same machine with the same costs of transportation and energy etc then the ULC might indeed reflect something we might call competitiveness. Assuming, always, that the profit is fixed.
That is seldom discussed, but it is important: because the ULC will be higher if wages are higher for the same output
and the price remains the same. Which obviously means that the profit will be lower; but the "competitiveness" will be unaffected. I do not see why that is considered a bad thing, personally: because it is just the same as lowering wages, and that is considered to be good. You need some fancy footwork to make a case for this different attitude, thought it can be done, sort of. Since it is pretty much unconvincing it is normally not addressed. Fact remains that you have to assume the same profit before you can relate UCL to competivenss: and that is a political as well as a practical decision. It also depends on how price is determined. That is a curious field which is beyond the scope of this post but I will just note that the outcome is very different depending on which part of the forest you happen to be in. If you think that price is determined by a fixed mark up on cost then higher wages will indeed push it up, by definition. If, on the other hand, you think that price is determined by a desire to put goods on the market at the lowest possible price commensurate with a thriving business ( ie, in response to the much vaunted benefit of keen competition), that does not follow. It depends on how much profit you think is necessary to that end. And of course that decision is not made by the employees. It is made by the person who gets the profit.
That problem is writ large when you come to look at the country level. For this simple reason, already touched on. There are no pencils.
In face of that fact the country UCL is derived from a sum which is like this:
Total Labour Costs/ GDP
You see the immediate problem when you remember that GDP is measured in one of two ways: it is the monetary value of all spending or the monetary value of all consumption in a country. So it includes the wages which are the numerator
Simply put it is of the form
P/ P+Y
That is not a measure of competitiveness in any sense at all. It is a measure of the share of national wealth which labour gets. And that is all it is.
Edited by FionaK - 28/7/2013, 11:47
