Productivity and labour costs
Destatis, 30 October 2007
The concepts
When evaluating the productivity results, it often happens that – especially for analysing the competitiveness of a national economy or of an economic sector – it is not sufficient for many questions to examine just that one figure. Productivity alone, without taking account of the relevant labour costs, has only limited information value for assessing the economic situation. For example, relatively low productivity combined with very low labour costs may very well lead to an overall cost situation that is better than high productivity combined with even higher labour costs. Therefore, other key indicators of national accounts should be taken into account in addition to productivity.
What is necessary for short-term economic analysis is not only a pure analysis of productivity but also, for instance, an examination of labour costs. From the employers’ point of view, labour costs reflect the price of the production factor of labour, whose level is determined by net wages, direct taxes and the charges to be borne by employees and employers.
The trend
According to results of national accounting done at the Federal Statistical Office (Destatis), the long-term trends of labour productivity, labour costs and, based on them, unit labour costs in Germany for the years 1991 to 2006 are as follows:
The overall labour productivity is calculated as the ratio of the price-adjusted gross domestic product to one person in employment or to one hour worked by one person in employment. An increase in the labour productivity per person in employment by a total of 22.5% and, when measured per hour worked, by 32.4% was recorded for the overall economy in Germany between 1991 and 2006. What is reflected by the obviously better trend of productivity per hour worked is the reduction of the number of hours worked on average per person in employment (self-employed and employees) which was observed in Germany over those 17 years (-7.5%).
The labour costs, that is the compensation of employees per employee, rose by 37.7% between 1991 and 2006. When measured per employee hour, the labour costs increased much more strongly (+50.7%), which is due to the fact that the number of hours worked per employee in 2006 was a good 8.6% smaller on average than in 1991.
Although the persons in employment on average produced a larger quantity of goods per person and per hour worked – as is obvious from the changes in labour costs and productivity –, the compensation of employees at the same time rose even more strongly. So, employers had the choice between raising the prices of the goods produced and losing part of their own profits. An indicator derived from those figures is unit labour costs, showing the numerical connection between labour costs and productivity.
Unit labour costs, which indicate the change of labour costs in relation to labour productivity, rose by 12.4% according to the person concept and by 13.8% according to the hour concept in Germany from 1991 to 2006. So, unit labour costs show similar trends from the two aspects. In the last three years, that is 2004, 2005 and 2006, unit labour costs decreased slightly on the relevant preceding year.
The consequences
How employers actually reacted to that cost pressure is shown by property and entrepreneurial income, which increased by over 74% between 1991 and 2006. However, that aggregate includes income received by employees (such as interest and dividends). In the same period, compensation of employees rose only by just under 36%, so that the share of compensation of employees in the national income, which is often used for collective bargaining, fell from 71% (1991) to just under 66% (2006).
Net wages and salaries are the money actually received by employees after deduction of social contributions and wage tax. In Germany, net wages and salaries rose by about 26% from 1991 to 2006, which was an increase by just under 28% per employee to a monthly EUR 1,458 in 2006.
Germany and the European Union (EU) – The international comparison
In an EU comparison, Germany’s labour productivity is 102 Purchasing Power Standards (PPS), which is slightly above the average of 25 EU states (EU25). Purchasing Power Standards means that, instead of using euros or “normal” exchange rates, the purchasing power in each of the 25 EU states was taken into account, too.
The trend of unit labour costs in a European comparison shows that the decrease over the last three years has probably improved Germany’s competitiveness. While unit labour costs in Germany decreased slightly in 2004, 2005 and 2006, they rose between 1% and 2% on an average of the EU member states in all three years.
Author:
Stefan Hauf - Federal Statistical Office Germany
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