I have received a few comments about a video I posted a few days ago, so let me just address some of the concerns here.
First, as I hope was clear from the video I have indexed all numbers to 100 in 2000 so I am talking about changes in relative unit labor costs and not the absolute levels. Let me first argue why this is the relevant data for my purposes and then show that with the imperfect data we have available absolute labor compensation – corrected for productivity – was in fact higher in Spain than in Germany in 2008.
I use the relative numbers for two reasons. First, it is much easier to compare Germany ’00 with Germany ’08 and correspondingly for Spain than it is to directly compare Germany and Spain directly; there are institutional differences, labor market differences and so on, that make the comparison of Euro-values alone difficult. But more fundamentally, if I want to talk about the changes in Spain’s ability to successfully compete internationally I have to talk about changes in labor costs and productivity. From 2000 to 2008 Spain’s current account deficit went from -4 to -10 per cent of GDP, whereas Germany’s went from -2 to +6 per cent of GDP. Germany has become relatively more competitive than Spain over this period, making it increasingly difficult for Spanish firms to employ people in Spain.
Fundamentally there are three ways a country can become more competitive internationally. 1) Through a slower growth in labor costs, 2) through higher productivity growth 3) through a depreciation of the currency. Before the introduction of the Euro, Spain could have a relatively higher wage-to-productivity growth than Germany as long as the Peseta depreciated against the Deutsche Mark. Since Germany and Spain now share the Euro this channel has been shut down. I plotted the development in the first two, and the unit labor cost is a combination of the two, showing that from 2000-2008 unit labor costs in Spain increased by 32 per cent whereas they remained practically constant in Germany. Note that whether there are “good” reasons for these increases in labor costs, ie. increases in living costs, is irrelevant for the present argument. In addition, note that a higher inflation is a part of the problem. If prices and wages in Spain in general increase by more than in Germany and they share a currency then Spain becomes increasingly less competitive. Unless, of course, the price increases reflect increases in underlying value, but that is exactly what productivity measures; and we know productivity has not kept pace with wages in Spain. Below I have drawn figures like the ones in the video, but with the absolute values of labor compensation (per hour), productivity (production value per hour), and the ratio of the two (unit labor costs).
First, it is clear that paying for an hour of work is more expensive in Germany than in Spain, but that the costs have increased relatively much more in Spain than in Germany (44 per cent from 2000 to 2009 in Spain versus 16 per cent in Germany). Second, naturally, this cannot be a measure of competitiveness. We need to consider productivity – output per hour – as well.
Figure 1. Labor compensation per hour. Note: Total labor compensation per hour worked. Source: OECD statistics.
Figure 2 plots absolute productivity measured as GDP per hours worked. It is clear that although labor costs are considerably higher in Germany output per worker is also considerably higher, having gone up from 33 to 37 Euros an hour (in constant prices) from 2000 to 2009, whereas the output per worker in Spain was only 27 Euros in 2009.
Correcting labor costs for productivity leads to figure 3, where it is clear that although Spain – by this measure had relatively low wage.
Figure 2. Absolute labor productivity in Germany and Spain. Note: labor productivity is measured as GDP (in constant prices) per hour worked. Source: OECD statistics.
Figure 3. Absolute unit labor costs. Source: OECD Statistics
Finally, some have pointed out that I talked about values up until 2008. It is a feature of business cycles that productivity often increases during the recession. There can be several explanations for that, one possibility is that firms start out by shutting down the least profitable divisions. With this in mind it would be difficult to attribute the recent measured increase in productivity in Spain to actual underlying increases in productivity, which is why I talked about 2008. However, extending the analysis to 2009 (the last year for which I have data) shows that unit labor costs have grown by 33 per cent in Spain and 5 per cent in Germany, which leaves the analysis entirely intact.
