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November 1994, Vol. 117, No. 11
International manufacturing and compensation costs
Sarah Van Damme
Japanese hourly compensation costs for manufacturing production workers rose to 114 percent of the U.S. average in 1993. Such costs fell relative to the United States in Canada and in each of the 14 European countries for which 1993 data are available.1
Relative costs rose to 16 percent of the U.S. level in Mexico and increased to 31 percent of the U.S. level in the newly industrializing economies (NIE's) of Asia-Hong Kong, Korea, Singapore, and Taiwan. Using new 1992 trade weights, weighted average costs for the 23 foreign economies for which 1993 data are available fell to the 1991 relative-cost level of 86 percent of U.S. costs. This is down from a historic high of 89 percent in 1992.
The compensation cost trend in Japan, which may now be considered a high-cost country (see chart 1), contrasts with Canada, where hourly compensation costs also declined from 106 percent of the U.S. level in 1992 to 97 percent in 1993. (See table 1.) Trade-weighted average costs in Europe also declined to 1 1 1 percent of U.S. compensation costs, from 123 percent in 1992; the largest decline occurred in Sweden, where costs fell by 45 percentage points to 107 percent of the U.S. level.
What compensation costs measure
The Bureau of Labor Statistics has developed comparative measures of hourly compensation costs to provide a basis for assessing international differences in labor costs. Comparisons based on the more readily available average earnings statistics published by many countries may be misleading. National definitions of average earnings differ considerably; average earnings do not include all items of labor compensation; and the omitted items of compensation frequently represent a large proportion of total compensation.1
The hourly compensation measures discussed here are based on statistics available to BLS as of early April 1994. The measures are computed in national currency units and are converted to U.S. dollars at prevailing commercial market currency exchange rates. These exchange rates are appropriate measures for comparing levels of employers' labor costs, but they do not indicate relative living standards of workers or the purchasing power of their incomes. Prices of goods and services vary greatly among countries, and commercial market exchange rates do not reliably indicate relative differences in prices.
Total compensation costs include pay for time worked, other direct pay, and employer expenditures for legally required insurance programs and contractual and private benefit plans. In addition, total compensation costs for some countries include other labor taxes. Changes in relative compensation-cost levels over time are affected by differences in underlying wage and benefit trends. They also are affected by frequent, and sometimes sharp, changes in relative currency exchange values.
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1 International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, 1993, Report 873, published in June 1994. This and other reports in this series present comparative levels and trends in hourly compensations costs in 29 countries and areas. Definitions of terms, methods, and data limitations are summarized in these reports. The report is available from the Bureau of Labor Statistics Washington, DC 20212
2 Hourly labor costs are an important element in determining the underlying price competitiveness of manufactured products. In 1991, they accounted for 69 percent of gross product originating (value added) in U.S. manufacturing. Unit labor costs - hourly labor costs divided by output per hour (labor productivity) - are a better measure of competitiveness. BLS publishes comparative trends in manufacturing unit labor costs for the United States and 13 of the foreign economies covered by the comparative hourly compensation measures described in the article. See Arthur Neff, Christopher Kask, and Christopher Sparks, "International comparisons of manufacturing unit labor costs," Monthly Labor Review, December 1993, pp. 47-58.
However, BLS has not constructed unit labor costs measures for the other economies covered by this article. In addition, BLS does not prepare level comparisons of unit labor costs because of the limits in the data and technical problems comparing levels of manufacturing output. See the appendix of "International comparisons of manufacturing unit labor costs."
For discussion of hourly and unit labor costs as competitiveness indicators, see Edwin R. Dean and mark K. Sherwood, "Manufacturing costs, productivity and competitiveness, 1979-93," Monthly Labor Review, October 1994, p. 3-16.
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