The effect of unit labour costs on exports

Exports have been picking up again in the Netherlands and the eurozone in recent years, following a period of only weak developments. What factors play a part in the development of exports? In the first place, naturally, developments in global trade are important. In addition, however, the competitiveness of a country is an important factor. This competitive position depends strongly on the exchange rate of the national currency, and the labour costs per unit of output. This article looks at the relationship between the development in unit labour costs and in exports.

Competitiveness

In addition to the exchange rate, competitiveness is also determined by the development in unit productions costs compared with that in other countries. A smaller increase in production costs than in other countries will lead to a relative improvement in the competitive position. It can therefore be expected that generally speaking, there is an inverse relationship between export developments and developments in unit labour costs. The development in unit labour costs is determined by the development in labour productivity and that of wage costs. We have published another focus article that goes into this. Unlike exchange rates, unit labour costs can be influenced by companies. It should also be taken into account that international economic developments also have a strong influence on exports. This is the reason that export developments in the various countries follow a similar pattern but at different levels. 

Unit labour costs

The labour costs per unit of output in the market sector are calculated here as compensation of employees (gross wage and social transfers) divided by the volume of production (deflated value added). Unit labour costs started to rise in the Netherlands in 1999, with surges in 2001 and 2002. At the same time, the rate of the euro against other currencies, especially the dollar, also started to rise. These two developments weakened Dutch competitiveness and this is reflected in the weak increases in goods exports in the period 2001-2003, although the slowdown in international trade in this period also had an effect. After 2003, the falling unit labour costs were accompanied by a pick-up in exports. 

Unit labour costs (market sector) and exports in the Netherlands

The relationship between labour costs and exports in other eurozone countries

Other countries in the eurozone show the same mirrored development between exports and unit labour costs. A decrease or only moderate increase in unit labour costs generally coincided with a favourable development for exports. This can be seen very clearly in Finland and Germany at the end of the last century.

Unit labour costs (market sector) and exports in Finland

Rising unit labour costs put pressure on competitiveness and therefore on exports. Italy is a good example of this: the unit labour costs have been rising there for a number of years, and since 2000 Italy’s exports position has been very weak.

Unit labour costs (market sector) and exports in Italy

In Germany, the relationship between unit labour costs and exports seems to be weaker. In spite of the fact that unit labour costs have shown only very moderate changes for years now, the export growth has slowed down since 2000. Other factors play a part here, such as the developments in international trade and increased competition on the global markets. However, in general terms the expected inverse relationship between unit labour costs and exports is apparent for all four countries.

Unit labour costs (market sector) and exports in Germany