were not shown on a 4-digit SIC basis; instead, they combined two 4-digit industries, or some but not all 5-digit parts of a 4-digit industry. These Census-provided industries were matched with the BLS value series used to measure productivity by choosing the 4-digit industry that accounted for 70 percent or more of the combined industry, measured by manufacturers' shipments in 1966. For example, BLS data for SIC 2085 were used to analyze SIC 20853, since this 5-digit part accounted for 90 percent of shipments of the 4-digit group. The industry matches are shown in Appendix A. COMPARATIVE INTERNATIONAL LABOR COST AND PRODUCTIVITY Prepared by the Bureau of Labor Statistics I. TRENDS IN UNIT LABOR COST SINCE 1960. II. TRENDS IN I. TRENDS IN UNIT LABOR COST SINCE 1960 Examination of trends in unit labor costs provides some insights into the trade competitiveness of the United States in relation to other countries. Indexes covering unit labor costs and related series for all manufacturing are available for the United States and ten other industrial countries and are summarized for the period 1960 to early 1970 in the accompanying tables and charts. While these indexes do not provide a comparison of the levels of labor cost per unit of output, they do indicate whether the overall U.S. unit labor cost position is improving or worsening in relation to our major trade competitors. However, they do not necessarily reflect an accurate picture of comparative trends for individual manufacturing industries or products. Table 1 and Chart 2 show that the trend in manufacturing unit labor costs in the United States from 1960 to 1969 was more favorable than in seven of the major trading partners covered by the indexes and about as favorable as in the other three. This overall good record is attributable to the first five years of the period, however, when U.S. unit labor costs declined at an annual average rate of 0.6 percent per year. The trend was reversed between 1965 and 1969 when U.S. unit labor costs increased at an annual average rate of 3.6 percent. In contrast, with the exception of Canada, all of the other countries substantially reduced their annual rates of increase in unit labor cost during the second half of the 1960's to well below the U.S. rate of increase. This general reversal of trends is highlighted in Chart 1, where the index of unit labor costs in the United States is compared with weighted average indexes for the eight European countries and for the European countries plus our major trading partner other than Canada, Japan. It should be noted that these comparisons are on a U.S. dollar basis, that is, they have been adjusted for major changes in exchange rates. Table 1 shows the rates of change on both a U.S. dollar and a national currency basis. In relating changes in unit labor costs to international commercial competition, however, the U.S. dollar basis should be used, since currency devaluations such as those in the United Kingdom in 1967 and in France in 1969 have the effect of lowering costs in those countries relative to other countries. The upward currency revaluations in Germany and the Netherlands in 1961 and in Germany in 1969 had the effect of raising German and Dutch unit labor costs in comparison with their trading partners. Excluding the effects of the 1967 devaluation, the United Kingdom had nearly as large a rate of increase in unit labor costs over the 1965 to 1969 period as the United States. The French devaluation came late in 1969 and therefore has little effect on cost trends over this four-year period. While unit labor costs declined at slightly less than 1 percent per year in the United States during the first half of the 1960's, those in Japan and every European country rose substantially. In Belgium, Sweden, and the United Kingdom, unit labor costs rose by about 3 percent per year; in Italy and the Netherlands, by 5 percent or more. In contrast with the first half of the 1960's, unit labor costs have increased quite rapidly in the United States since 1965. This has been coincident with a relatively high utilization of resources. The unemployment rate in 1966 declined on an annual basis to less than 4 percent for the first time since 1953, and capacity utilization was the highest in ten years. With the economy operating at a high level of utilization, upward pressures on prices and wages were intensified. A high employ ment situation also tends to eliminate gains in output per man-hour that result from the utilization of unused capacity, a significant contributing factor to the relatively high productivity increases and low unit labor cost increases that occurred during the early 1960's. For Japan and the European countries, the second half of the 1960's have been generally favorable. Unit labor costs declined by somewhat less than 1 percent per year from 1965 to 1969 in Belgium, Japan, and Switzerland (wage earners only),1 and also in the United Kingdom after Note.-The cost of producing goods in the United States relative to other countries is an important element in determining the flow of trade. Labor costs, in turn, constitute a major factor in understanding the movement of total costs. In the US. manufacturing sector, for example, employee compensation amounted to 68 percent of gross product originating in 1969. In other industrial countries, the proportion ranges from about 50 to 70 percent. * Labor costs refer to all production costs which are allocable to labor and include all payments made by employers directly to their employees; employer contributions to legally required insurance programs and private welfare plans for the benefit of employees; employer costs for welfare facilities and services; employer expenditures for training and recruitment; and payroll taxes for general revenue purposes. 1 Data are not available for Switzerland to construct unit labor cost indexes for all employees. In general, salary workers are increasing as a proportion of total employment in manufacturing in all countries. Since salary worker compensation is higher on average than wage worker compensation, unit labor cost indexes based on the compensation of wage earners alone show smaller increases, or larger declines, than indexes based on the compensation of all employees. taking account of the 1967 devaluation. The rate of increase in the other European countries, on a U.S. dollar basis, ranged from less than 1 percent in France and Sweden to about 2 percent in Germany and the Netherlands. U.S. unit labor costs during this period increased at a rate of 3.6 percent per year. From 1968 to 1969, U.S. unit labor costs increased by 4.2 percent, the highest yearly increase during the decade. Between the first half of 1969 and the first half of 1970, the rate of increase was even larger at 6 percent. However, preliminary 1969 and early 1970 data for Japan and the European countries appear to indicate that most of these countries also had relatively large increases in unit labor costs as a result of very substantial increases in hourly labor costs that outran increases in productivity. II. TRENDS IN HOURLY COMPENSATION AND Unit labor costs reflect the relationship between hourly labor costs and productivity (output per man-hour). To the extent that increases in compensation are offset by gains in productivity, inflationary cost pressures are avoided. To better analyze trends in unit labor cost, therefore, it is useful to look at the underlying trends in hourly compensation and productivity. From 1965 to 1969, average hourly compensation in U.S. manufacturing rose at a 5.8 percent rate; however, the productivity gain was only at a rate of 2.1 percent. (See Tables 2 and 3 and Charts 3 and 4.) Hence, the rise in unit labor costs. In most of the other countries, the rates of increase in hourly compensation exceeded those in the United States, but were more than or nearly offset by the differences in productivity growth. Productivity in European countries grew at annual rates of 4 percent or more from 1965 to 1969 and the rate of increase in Japan amounted to 15 percent, in contrast to the U.S. 2.1 percent rate. In the first half of the 1960's, both hourly compensation and productivity in the United States increased at slower rates than in Japan or in most of the European countries. During this five-year period, however, increases in hourly compensation in the United States were more than offset by larger increases in productivity, resulting in a decline in unit labor costs, while the generally larger productivity increases in Japan and Europe were not sufficient to offset the even more substantial increases in hourly compensation. III. COMPARATIVE LEVELS OF UNIT LABOR COSTS AND PRODUCTIVITY It would be desirable to have measures of the levels of labor costs per unit of output and of output per man-hour for the economy and for individual industries. However, because of data limitations, these measures for the total economy cannot be derived and absolute comparisons can be developed for only a few individual industries. |