Real wage costs in manufacturing

Declining competitiveness is best captured in a single indicator unit labor costs, which measure the average cost of labor per unit of output. In a monetary union, discrepancies in wage growth relative to productivity gains that is, unit labor costs will result in a chronic accumulation of trade surpluses or deficits.

A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.

These countries had already lost export market shares to China and other low value added and labor intensive Asian economies. Then a decade of nominal wage growth that out paced productivity gains led to a rise in unit labor costs, real exchange rate appreciation, and large current account deficits.

Persistently weak labor productivity growth has created a situation in which unit labor costs do not fall, even if real wages remain stagnant or decline. Indeed, despite a 1.3 drop in real wages in 2011, unit labor costs remained unchanged.

According to the 12th Five Year Plan, the minimum wage should grow by 13 per year. Together with real appreciation, the increase in labor costs is bound to weaken the competitiveness of China s labor intensive export sector, which will be reflected in the trade balance more clearly in the coming years.

nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.

The national minimum wage is determined at the negotiating table by the Labor Consultative Commission, where Government, Employers and Trade Unions are represented.

Only after the Iron Curtain s fall and the establishment of market economies in ex communist countries did the lack of competitiveness of German workers become apparent. The country with the highest labor costs in the world was confronted with low wage competitors next door.

The result is that free markets don t generate enough final demand. In the US, for example, slashing labor costs has sharply reduced the share of labor income in GDP.

As labor costs continue to climb, is China set to lose its coveted spot as the world s workshop?

As migrants move between markets with well defined property rights, immigration in principle is beneficial for both the immigrants and the target country. The immigrant receives a higher wage than at home, and the target country benefits from cheap labor, which creates more value than it costs.

Furthermore, the decline in the working age cohort would squeeze labor supply, fueling wage growth and eroding the country s economic competitiveness. Already, in the Yangtze and Pearl River Deltas, where manufacturing activity is the densest, labor shortages have appeared.

What matters for the amount of labor supplied is the after tax wage rate relative to income from wealth. While after tax wage rates soared for more than a century, wealth and the income it brought grew just as fast.

Nominal wage Actual wage

A slowing down of the rate of growth of the average wage to a level nearing the dynamics of living costs.

In much of Europe, which provides stronger wage protection, unemployment has soared, especially since the euro crisis began in 2008. Germany and some Northern European countries remain an exception, although the German labor market contains a large low wage, mini jobs segment.

Enhancing wage flexibility in an environment in which unemployment exceeds 11 will allow firms to cut wages, and lower labor costs will permit them to cut prices in an effort to gain market share. Deregulation that intensifies product market competition will similarly lead to lower prices (that being what competition does).

And coding supported products often have lower costs per unit of output than even very cheap labor can provide. So, whereas call centers, for example, used to be mostly staffed in low wage countries, now the computer robot that does most of the talking can be located in New York.

That said, Europe s disparities in production costs and competitiveness, reflected in the problem countries substantial current account deficits, may prove to be an even more difficult problem to resolve. Unit labor costs in Greece, Portugal, Spain, and Italy grew 20 30 faster than in Germany in the euro s first decade, and somewhat faster than unit labor costs in northern Europe as a whole.

In fact, focusing on the minimum wage would almost certainly speed up the automation process. Previous evidence that minimum wage legislation does not reduce the demand for labor might not stand up against the rapidly falling cost of automating the production of goods and services.

These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor intensive and low value added exports. After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply.

Indeed, excessive wage deflation is likely to have negative effects on productivity. Skilled labor is likely to emigrate faster, and extreme austerity, falling prices, and high unemployment and the resulting likelihood of social tension are not exactly conducive to investment, innovation, or labor mobility.

Those, their recompense is forgiveness from their Lord and Gardens underneath which rivers flow, where they shall live for ever. How excellent is the wage of those who labor.

Those, their recompense is forgiveness from their Lord and Gardens underneath which rivers flow, where they shall live for ever. How excellent is the wage of those who labor.

Another factor behind the upturn is the meaningful progress that a number of European countries, such as Spain, have made on structural reform. Labor market regulation has been loosened, and unit labor costs have come down.

As has been painfully obvious during the last several years, prolonged labor market slack means falling real wages for most workers, with the negative effect intensifying as one moves down the wage distribution. By the same logic, stronger growth in 2014 and tightening labor markets should lead to healthier wage gains for the 70 of the workforce whose real wages have not yet returned to their pre recession level.

Optimal trade intensity depends on many factors such as relative labor costs, transport costs, productivity levels, and economy of scale effects. Trends in these factors might make reduced trade intensity not only inevitable but desirable.

Those who believe and do good deeds We shall lodge them in the rooms of Paradise underneath which rivers flow, therein living for ever, an excellent wage for those who labor,

Those who believe and do good deeds We shall lodge them in the rooms of Paradise underneath which rivers flow, therein living for ever, an excellent wage for those who labor,

Middle income families also insist on buying homes, despite the highest multiple of home price to income among advanced economies and a housing finance system that imposes high borrowing costs. South Korean women still drop out of the labor force when they marry or have children only 38 of families have two wage earners (half the OECD average).

Relation of the minimum wage to an average wage in

164. Although the Committee takes note of the increase in the minimum wage, it is concerned that the minimum wage remains below the cost of subsistence, as acknowledged by the delegation of El Salvador the minimum wage amounts to 1,050 colones in urban areas and 900 colones in rural areas, while basic subsistence costs amount to 4,500 colones.

The second path is to follow the German model of accelerating structural reforms and corporate restructuring to increase productivity growth while keeping wage growth moderate. But it took a decade for Germany to reduce its unit labor costs that way if Greece or Spain were to start today, the short run costs of resource reallocation would be large, while the benefits in terms of higher growth would take too many years to achieve.

Wage earners

No wage

Higher growth of the minimum wage than of the average wage.

From 1992 to 2011, labor productivity grew at an average annual rate of 0.9 , the lowest in the OECD. Since 2001, unit labor costs have been growing faster than real GDP and employment, undermining the economy s competitiveness vis à vis developing countries.

The first baby boomers have reached retirement age, and the labor force will soon be shrinking in most parts of Europe. To cover the costs of aging and maintain its position as an economic power, Europe must increase overall labor participation considerably.

Second, the early success of China infrastructure was built on cheap land, capital, and labor. But, despite modern infrastructure, logistical costs within China are 18 of production costs, compared with 10 in the US, owing to various internal inefficiencies.

Unsurprisingly, high payroll taxes strained the capacity of working people and mounting non wage labor costs eroded companies' international competitiveness. For a while, borrowing hid the extent of the problem but today the extent of the burden that the accumulated debt that resulted from this borrowing is placing on future generations a grave injustice in its own right is clear.

Gender wage gaps

Minimum annual wage

Average monthly wage

Minimum wage index