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An input–output analysis of unit labour cost developments of the German manufacturing sector since the mid-1990s

An input–output analysis of unit labour cost developments of the German manufacturing sector... According to empirical studies, a statistically significant factor for German exports success is high cost (or price) competitiveness. Studies by Deutsche Bundesbank recommend correcting the nominal effective exchange rate by broad cost (or price) indicators (Deutsche Bundesbank, 1998, 2016a). This would call for total economy unit labour costs. In contrast to these findings, Dustmann et al. (2014) suggest using refined unit labour costs for the exporting manufacturing sector only, corrected for inputs from other sectors and from abroad in an Input–Output (IO) analysis framework. According to these authors’ novel calculation, the export-oriented manufacturing sector of Germany experienced a decrease in unit labour costs by 25% between the mid-1990s and 2007. We try to replicate their find- ings. Following standard approaches in calculating sectoral unit labours costs, correcting for inputs from other sectors and from abroad, and using consistent input–output data from the Federal Statistical Office and from the World Input–Output Database, nominal unit labour costs of the manufacturing sector did not decrease over the period of analysis, and developed similarly to total unit labour costs. The similarity to total economy costs is also confirmed for a more recent period. In contrast to these authors’ claim, our findings are in line with recommendations of Deutsche Bundesbank for using total economy unit labour costs. Keywords: Input–output analysis, German exports, Cost competitiveness, Unit labour costs, Real effective exchange rate, Manufacturing sector, Wage costs, Outsourcing JEL Classification: C67, F16 1 Introduction explain geographical as well as product specialization Export growth depends on several factors: price or cost (Altomonte et al., 2013). competitiveness, non-price competitiveness, the struc- Concentrating on cost (or price) competitiveness of a ture of export products, growth in export destination country’s exports, the most prevalent indicator is the countries, and, as a result, demand from these countries real effective exchange rate (REER), a weighted average (see Altomonte et  al., 2013; Karadeloglou & Benkovskis, of indexed nominal bilateral rates between countries, 2015 for overviews). Non-price competitiveness com- adjusted for relative movements of cost or price indica- prises the size of firms and technological capacities, taxa - tors of the respective countries. Even though manufac- tion, access to finance, public support for research and tured goods dominate German exports, REER adjusted development, and the location of the country that can for unit labour costs of the manufacturing sector would yield a distorted picture of cost competitiveness of Ger- man exports, as they do not include the cost relieving effect of intermediate goods from other domestic sectors *Correspondence: heike.joebges@htw-berlin.de and imported intermediaries (Deutsche Bundesbank, HTW Berlin, University of Applied Sciences, Berlin, Germany 1998, pp. 41–45). Broad-based cost (or price) indicators Full list of author information is available at the end of the article © The Author(s) 2022. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http:// creat iveco mmons. org/ licen ses/ by/4. 0/. 1 Page 2 of 15 N. Albu et al. perform better in explaining and forecasting German exporting manufacturing sector. This period also allows exports than narrowly defined ones (Deutsche Bundes - for a refined correction of price developments. The last bank, 1998, updated 2016a). Thus, total economy unit Sect.  7 concludes, pointing to the advantages of total labour costs are seen as a better correction than sectoral economy unit labour costs. unit labour costs. Since the introduction of the euro, the focus for cost 2 Background: total economy versus sectoral unit (or price) competitiveness has shifted from exchange rate labour costs movements, as they are no longer under national control, While relative unit labour costs can be shown to be to national cost or price developments. For Germany, relevant for cost competitiveness of exports, several several authors see a pivotal role for export success in low authors discuss the appropriateness of sectoral over total unit labour cost developments (see Flassbeck & Lapavit- economy unit labour costs: Total economy wages would sas, 2012; Dustmann et  al., 2014). Yet, in contrast to the include public sector as well as wages from private sec- Bundesbank’s recommendation to concentrate on broad tors like the services sector. Consequently, total economy cost aggregates like total economy unit labour costs, unit labour costs are not always considered as adequate Dustmann et al. (2014) stress that unit labour costs devel- for determining the cost competitiveness of the export opments for the exporting manufacturing sector are the industry. The Bundesbank shows that for the peripheral ones that should be scrutinized. Based on input–output euro area crisis countries the main driver of unit labour (IO) coefficients for Germany, Dustmann et  al. augment cost increases was mainly high public sector wages, not sectoral manufacturing unit labour costs for outsourc- private sector ones (see Deutsche Bundesbank, 2016b). ing of manufacturing production to the services sector. Similarly, Gaulier and Vicard (2012) stress that wage Additionally, they include imported inputs of the manu- developments in non-tradable sectors (instead of export- facturing industry. According to their novel method, oriented manufacturing sectors) triggered the overall unit labour costs of manufacturing exports decreased increase in unit labour costs and prices in exports of by a quarter during 1995 and 2007. Based on these find - peripheral euro area countries. ings, they claim that the real increase in German price The “compendium on the diagnostic toolkit for com - competitiveness is higher than measured by OECD data petitiveness” argues that “measuring price competitive- for total economy unit labour costs. According to the ness based solely on unit labour cost (ULC) developments authors, the enormous decrease in production cost “[…] risks conveying misleading signals” (Karadeloglou & has been the main reason for Germany’s economic suc- Benkovskis, 2015, p. 4). In times of increasing interna- cess over the last decade.” (Dustmann et al., 2014, p.168). tionalization of trade, even wage and unit labour costs Our paper replicates their calculations and discusses developments for individual sectors may be inappropri- the novel approach in detail. We try to show that the ate as they hide inter-firm differences. Barba Navaretti approach is not fully convincing. Conducting a full et al. (2016) show that average productivity developments input–output-analysis based on consistent IO data leads may mask very different distributions of company pro - to estimates of unit labour costs in the manufactur- ductivity, regarding the length of the tails and the skewed ing sector that do not differ in a relevant way from total nature of the distribution. In addition, non-price compet- economy unit labour costs. Given the delay in availabil- itiveness may be just as relevant (Karadeloglou & Benko- ity of IO data, we therefore recommend to stick to total vskis, 2015). economy unit labour costs for cost competitiveness Yet, recent studies find a statistically significant effect considerations. of REER based on total economy unit labour costs in The next Sect.  2 will first summarize pros and cons of estimations for export developments (see Leigh et  al., sectoral unit labour costs, before presenting the method 2017 for a sample of 60 advanced and emerging market for calculating these costs in Sect.  3, where we contrast countries; Deutsche Bundesbank, 2016a for a sample of our approach with the one used by Dustmann et  al. 20 advanced countries with a focus on Germany). Dust- (2014). Section  4 presents the findings, contrasting the mann et al. (2014) stress that total unit labour costs even authors’ findings for the period 1995–2007 with our overstate cost developments of the exporting manufac- results. Section  5 discusses the underlying differences turing sector in Germany. The authors try explicitly to and implicit assumptions.. Section  6 replicates the cal- calculate adjusted unit labour costs for German export- culation of manufacturing sector unit labour costs cor- ing industries, only including those manufacturing seg- rected for imported inputs and inputs from other sectors ments where export shares are above 25%. for the period 2000–2016. The findings are supposed Their approach is partly motivated by wage cost dif - to stress the result that total economy unit labour costs ferences between the manufacturing and the services are an adequate indicator for unit labour costs of the sector: Labour costs for the manufacturing sector in An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 3 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Domesc Inputs Total Foreign Inputs Central and East European (incl. Russia a. Turkey) Inputs Fig. 1 Development of inputs relative to output (production value) for the German Manufacturing sector since 1995, 1995 = 100. Inputs relative to production value (“end product”); imports from Central and East European countries include those from Turkey and Russia; for further details see Appendix 1, 3, and Albu (2018). Source: Intercountry Input–Output Tables from World Input–Output Database, Release 2013 for the years 1995 to 2007; own calculations; 1995 = 100 Germany have been much higher than for the services correct for the differences in full-time and part-time sector, in contrast to most other euro area countries (see shares between the manufacturing and the services sec- Logeay et  al., 2011; Hartwig & Krämer 2017). The cost tor. Albu (2017) finds a wage-cost relief effect for the Ger - difference between the two sectors is highest in Germany man manufacturing industry through the procurement of and amounted to about 20% during the 2000s (Herzog- domestic services of between 8 and 10%. Albu (2017) and Stein et al., 2015, p.7). Consequently, any outsourcing of Ludwig (2013) concentrate on direct and indirect labour activities to the services sector should lower wage costs costs effects, not unit labour costs. of production in the manufacturing sector. Next to inputs from the services sector, imported Yet, as we will show below, the correct procedure by inputs are another factor to correct for. The global trend which interlinkages between manufacturing and service towards greater world trade integration via global value sectors are included is quite complicated. Yet, in the fol- chains, export processing, and other forms of trade lowing, we stick to the overall manufacturing sector integration also affects production in Germany, and as instead of the exporting manufacturing sector, as the dif- a result, exports. The contribution of imported inputs ference in unit labour costs is negligible (see Appendix 3, to value added of exports and imports for re-exports Fig. 6). increased from 30% in 1995 to about 44% in 2006 In order to exactly determine the wage-cost-relief effect (Loschky & Ritter, 2007, p.485). for the German manufacturing sector through the use Imported intermediate products in manufacturing of domestic inputs from the services sector, Albu (2017) output increased from 1995 to 2007 by 70%, as Fig.  1 uses an input–output analysis. By taking the interdepend- shows. Imports increased especially from Central and ence between the manufacturing sectors into account, East European countries (including Turkey and Rus- the approach allows to measure and compare the over- sia). Consequently, total German domestic inputs have all labour costs of each final product, directly accounting decreased during the same time, but still amount to for compensation of employees in production according about 66% of overall total inputs in 2007 (Albu 2018). to the different sectors. As the data provides information Ignoring inputs from other sectors and from overseas on wage costs per person in different production stages, would indeed distort true unit labour costs in manufac- a hypothetical value for macroeconomic labour costs can turing, as Dustmann et al. (2014, p.173f ) rightly state. We be calculated by statistically aligning the distribution of working hours of all production areas and their hourly wages with the distribution of working hours and hourly wages in manufacturing. Ludwig (2013) and Albu (2017) Similarly, Dustmann et al. (2014, p.174) calculate 70%. 1 Page 4 of 15 N. Albu et al. therefore correct for it when calculating unit labour costs negligible (see Appendix 3, Fig. 6). Consequently, we will in manufacturing. concentrate on showing the effects for the whole manu - facturing sector. 3 Method: Measuring unit labour costs Particularities involve the following: of the export industry Our paper replicates the approach by Dustmann et  al. • The calculation for the “end product” instead of for (2014): We calculate unit labour costs of the manufac- the “value added”, turing sector based on a full input–output analysis, tak- • The calculation of “real ” instead of “nominal” unit ing into account inputs from other domestic sectors and labour costs imported inputs. The standard calculation for sectoral • An inadequate correction for imported inputs by unit labour costs (i.e., manufacturing labour costs) is relying on coefficients for imported inputs instead of gross wages and salaries plus social security contributions using global interlinkages from employers in the (manufacturing) sector divided by • An incomplete correction for inputs from other persons employed (or hours of employment), in relation domestic sectors to productivity per person (or per hour) in that sector. • Usage of different data for numerator and denomina - Productivity per person (or per hour) is measured by real tor manufacturing gross value added divided by employment in persons (or hours) or labour force in that sector. Mostly, the effect of each of the particularities on the We try to stay as close as possible to the method used in final cost-relief estimates is comparatively small. How - Dustmann et al. (2014), yet, we stick to conventions: We ever, the use of real unit labour costs instead of nominal calculate nominal unit labour costs for the manufactur- ones has an important effect on final cost-relief calcula - ing sector. We fully correct for interlinkages with other tions. Furthermore, the largest effects arise from the domestic sectors and for imported inputs by an input– usage of “end product” instead of “value added” and from output analysis, thereby focusing on value added of this the adjustment for inputs from other domestic sectors. sector. Calculations for unit labour costs in the German The authors motivate the concentration on unit labour manufacturing sector that account for inter-sectoral link- costs for the “end product”, instead of “value added”, by ages and imported inputs are based on national accounts arguing that this is important for correcting for inputs data from the German statistical office (Destatis) and from other sectors as well as including imported inputs Intercountry Input–Output tables (WIOD), Release 2013 (Dustmann et  al., 2014, pp.173–4). Yet, the corrections for the years 1995 to 2007, complemented by own calcu- seems to be incomplete and inconsistent, as we will show lations (see below). If necessary, we provide additional below. information on the data used in figures (see sources) and in appendices. 4 Results for the period 1995–2007 The authors use a simplified calculation for the trad - Figure  2 shows the effect of three differences to their able manufacturing sector (see additional materials for approach: (1) We calculate unit labour costs for the value Dustmann et  al. 2014 in the Online-Appendix, Figure  4 added instead of for the “end product”, as this is the com- and Table A2). For the means of comparison between the mon indicator. (2) We use a full input–output-analysis Dustmann et  al. (2014)-version of unit labour costs and based on the corresponding global IO-data in order to our calculations, we mirror the authors’ approach, but in fully correct for interlinkages with other sectors. (3) contrast to Dustmann et al. (2014) we are using the meth- We include all relevant wage costs. In order to be able to odologically consistent data provided by an input–output compare only these effects with their approach, we show analysis (Albu 2018). Details will be explained below. the outcome for real unit labour costs (even though nom- Dustmann et  al. use a novel approach of calculating inal costs are the relevant factor for cost competitive- sectoral unit labour costs. We will try to explain the rel- ness). The development we calculate is depicted by the evance of each particular assumption. While each par- interrupted line “Real Unit Labour Costs Total Manufac- ticular step may have limited effects on calculated cost turing Global Interlinkages”. As one can see in Fig. 2, real developments, the combination strongly affects the final unit labour costs for this sector decrease in our approach result. As already explained, Dustmann et al. (2014) con- by only 12%, not by a quarter as in their publication. In centrate on the export-orientated manufacturing sec- tor (those segments of the manufacturing sector with an export share above 25%), but any difference with the Based on this approach, we do not only correct for the cost-relieving effect of imported inputs and inputs from other sector. This approach also takes total manufacturing sector regarding unit labour costs is into account that intermediate goods from the service sector may contain imported inputs. An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 5 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Real Unit Labor Costs Total Manufacturing Domes�c Interlinkages "Value Added" Real Unit Labor Costs Total Manufacturing Global Interlinkages "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 2 Real unit labour costs for the “end product” according to Dustmann et al. (2014) compared to real unit labour costs for the “value added” including domestic and global interlinkages based on IO-analysis, 1995 = 100. Real Unit Labour Costs Total Manufacturing Domestic Interlinkages “Value Added” as well as Real Unit Labour Costs Total Manufacturing Global Interlinkages “Value Added” indices are based on input–output analysis; for further details see Appendix 1, 3, and Albu (2018). Source: Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; Intercountry Input– Output Tables of World Input–Output Database Release 2013 for the years 1995 to 2007; own calculations; 1995 = 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Unit Labor Costs Total Manufacturing Domes�c Interlinkages "Value Added " Nominal Unit Labor Costs Total Economy "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 3 Different measures and concepts of unit labour costs. For further details see Appendix 1, 3, and Albu (2018). Source: Dustmann et al,. (2014); Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2013 inclusive; own calculations; 1995 = 100 1 Page 6 of 15 N. Albu et al. Figs. 2 and 3, the bold line “Dustmann et al. (2014) [Real] struction. As a result, it is not surprizing that the Unit Labour Costs: ‘End product’ based on IO coeffi - unit labour costs for the end product calculated by cients” always represents unit labour costs of the export- Dustmann et al. decrease. ing manufacturing sector as calculated by Dustmann iii. The authors try to account for inputs from other et  al. (2014): in real terms, for the “end product”, and sectors. Yet, instead of conducting a full IO analy- based on IO coefficients in order to account for inputs sis for the unit labour cost index, required from a from other sectors. methodological point of view, they use the coeffi - cients of the inverted IO-matrix for including wage 5 Discussion of results for the period 1995–2007 costs from other sectors. This approach does not We judge the usage of IO coefficients for imported inter - correctly account for all interlinkages and econo- mediate products instead of fully accounting for global mies of scope and, in particular, does not correct interlinkages based on an IO-analysis and data sources as for differences in the share of part-time workers suboptimal due to the following reasons: between sectors. The latter has a significant influ - ence on the calculation of the cost advantages of i. Usage of inconsistent data: While the authors use the German industry relative to the industries of output variables from the Federal Statistical Office, other countries in the use of cost-effective inputs they do not complement it with the consistent sec- from the services sector, as Ludwig (2013) and toral labour cost data available for this purpose for Albu (2017) show. their IO calculations, but use instead data from iv. The authors miss this redistribution in the denomi - the Sample of Integrated Labour Market Biogra- nator because no IO coefficients were used. The phies (SIAB), coupled with IO coefficients (see assumption that the end product contains the value Dustmann et al., 2014, Appendix B, Table 2a). The added shares of the purchased intermediate con- SIAB is a 2 percent random sample drawn from the sumption is only partially correct, since the deduc- Integrated Employment Biographies (IEB) of the tions of value added for use of other intermediate Institute for Employment Research (IAB). By using consumption were not taken into account. This is this data set, several distortions occur: The specific particularly the case for the export-strong indus- development in East Germany is ignored and the tries, since finished parts are exported in order to changes in employers’ social security contributions be reused. are not taken into account. Contrary to the authors’ v. Furthermore, Dustmann et  al. justify the decision statement (Dustmann et  al., 2014, p.171), the to measure unit labour costs on the basis of the increasing wage spread in individual sectors can- industrial end product by the fact that not only not have any influence on the calculation of unit upstream inputs from Germany but also those labour costs, as only average labour costs per capita from abroad are to be included, since the produc- are used for this purpose. In order to avoid these tion value includes all imports (Dustmann et  al., problems, we use instead national accounts data for 2014, p.176). In principle, nothing would stand in Germany (including East Germany and employers’ the way of the inclusion of imported intermediate social security contributions). inputs, especially as these have increased sharply ii. The authors calculate unit labour costs for the “end over the period under study, especially imports product” but only include domestic cumulative of German manufacturing from Eastern Europe inputs (based on domestic IO coefficients), losing (Albu, 2018). However, the linkages with other intercountry interlinkages. This methodological countries are absent in the indicator Unit Labour shift accounts for about 15  percentage-points dif- Costs: "End Product", since the IO coefficients of ference of the final decrease in costs (see the dotted Destatis used by Dustmann et  al. in connection line “global Interlinkages” for the corrected value with the production value (Dustmann et  al., 2014, added approach that at the same time corrects for Appendix B, Table A2) refer only to domestic pro- global interlinkages with other countries/sectors duction, excluding imports, and therefore do not versus the bold line for Dustmann et al. (2014) “end offer weights for foreign inputs to production. In product” in Fig.  2). This approach implies ignoring order to correctly account for imported inputs, the the wage costs incorporated in the imported inputs authors should have used global intercountry IO- but using overall output at the same time. Given tables, provided e.g., by WIOD. Figure  2 shows that imported inputs increased over the period studied by the authors, this approach generates a WIOD provides an intercountry-Input–Output Table for the years 1995 to negative trend in the calculated indicator by con- 2011 and 2000 to 2014. An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 7 of 15 1 that the use of input coefficients stemming from Domestic Interlinkages ‘Value Added’” in Fig.  3) and global IO-tables for interlinkages and economies of are thus closer to unit labour costs of the total economy scope would have led to a different development of (line “Nominal Unit Labour Costs Total Economy ‘Value unit labour costs including domestic interlinkages: Added’” in Fig. 3). lower in the second half of the 1990s and almost Based on this criticism, we think that the approach identical in the 2000s. used by Dustmann et  al. (2014) is not convincing and heavily understates true cost developments in the (trad- In contrast to the authors, we stick to calculating nomi- able) manufacturing sector. Figure  2 demonstrates nal unit labour costs that we deem more appropriate for the effects of particularities in the approach by Dust - measuring cost competitiveness. That the authors cal - mann et  al. (2014): The use of “end product” instead of culate real unit labour costs is a consequence of having “value added” decreases unit labour costs by more than nominal values for wages and salaries in the numerator 10  percentage-points. Concentrating on real unit labour and nominal values for output in the denominator, by costs instead of nominal unit labour costs, adds another using the nominal “end product” instead of real value 10 percentage-points (see Fig. 9 in Appendix 3). added and IO coefficients of Destatis based on input– We agree with Dustmann et  al. (2014) and Deutsche output tables with nominal values. If the indicator Bundesbank (1998, 2016a) that unit labour costs for the reflected total economy unit labour costs, it would serve manufacturing sector are not a good indicator for the as an indicator for income distribution (measuring the competitiveness of the German manufacturing export wage share of GDP in real terms), instead of an indicator sector, as this indicator would ignore lower cost inputs for nominal costs per unit of output. While they argue from the service sector and from abroad. Yet, the rep- that the difference between real and nominal unit labour lication of Dustmann et  al. (2014) and the necessary costs is negligible, we show below that this difference corrections show that their particular approach is not amounts to about 10  percentage-points for the manu- convincing and overstates the decline. An indicator for facturing sector and cannot be ignored (see Appendix 3, nominal unit labour costs in manufacturing based on Fig. 9). consistent IO coefficients and consistent data sources Correctly accounting for interlinkages stemming from would even indicate increasing costs (see Fig. 4). intermediate inputs from other sectors, nominal unit labour costs even increase in the period from 1995 to 6 Robustness check for the period 2000–2016 2007, since productivity in the services sectors is lower In addition to the computation of nominal labour costs than industry’s (Fig.  3). The overall lower productiv - in manufacturing including domestic interlinkages based ity development resulting from the interlinkages with on a price index deflation (Albu 2018), we replicate the the services sector increases both real and nominal unit indicator using a refined measure (Albu, 2020) including labour costs, i.e. irrespective of whether the production two methodological differences with regards to the com - value or gross value added is used as the denominator putation in Fig. 3: firstly, the price deflation used is based in the calculation of productivity. This explains the sur - on a chain index deflation of the value added (denomina - prising result that the inclusion of services sector inputs tor); secondly, the interlinkages computed are based on increases unit labour costs, due to the lower productivity supply-use tables for industry classification (see Fig.  10 in in this sector. Yet, this effect might be overrated because Appendix 3). the higher share of part-time workers in the service sec- tor in fact lowers the measured productivity increase in this sector (Albu, 2017). Ultimately, the authors’ idea of including the inter- The increase of nominal unit labour costs for the total manufacturing indus - linkages between the different sectors leads to a result try including domestic interlinkages compared to the base year seems to be in which the unit labour costs of industry, including the overestimated by about 10 percentage points in 2007 (as the gap between the interlinking effects using the IO-methodology, show development of real and nominal unit labour costs without interlinkages only makes up for about 10%. This can be seen in figure A4 in appendix III). The no decline at all in the period under consideration (line calculated increase is mainly due to the partial unavailability of price indices “Nominal Unit Labour Costs Total Manufacturing for the respective period, especially for the service sectors (see Albu, 2018). Discounting the 10 percentage points difference from the nominal unit labour costs including interlinkages would a) decrease the gap in figure A6 (appendix III) to still about 25 percentage points between the nominal unit labour costs with interlinkages and Dustmann et al. (2014) adjusted version of the former and b) change the line “Nominal Unit Labour Costs Total Manufacturing Domestic Interlinkages ‘Value Added’” to be closer to unit labour costs of total As the indicator only refers to the manufacturing sector, it cannot be consid- economy (line “Nominal Unit Labour Costs Total Economy ‘Value Added’”) ered as an indicator for income distribution. in Fig. 3. 1 Page 8 of 15 N. Albu et al. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Nominal Unit Labor Cost Total Manufacturing Domes‰c Interlinkages "Value Added" (defla‰on based on price index, Albu 2018) Nominal Unit Labor Cost Total Manufacturing Domes‰c Interlinkages "Value Added" (defla‰on based on chain index, Albu 2020) Fig. 4 Different Measures, Concepts and Deflation Methods of ULC. For further details see Appendix 1, 2, 3 and Albu (2018, 2020). The nominal unit labor cost total manufacturing domestic interlinkages “Value Added” (deflation based on chain index, Albu 2020) has been computed via IO-modelling in Albu (2020) for the years 2000, 2005, 2010, 2013, 2015 and 2016. All points in between are estimates based on averages for graphical purposes. Source: For both series ending in 2007, see source Fig. 3. For the series running up to 2016: Federal Statistical Office, National Accounts, Input–Output Accounts, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production. Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2018 edition Figure  4 shows a level difference between the trend manufacturing exports differs between countries, sec - of the computation based on the price index deflation toral unit labour costs would have to be calculated (Albu, 2018) and the computation based on the chain matching the respective export composition. It would index deflation (Albu, 2020). Despite the level difference, be required to include the cost effect resulting from the which is mainly due to the deflation methods, neither of interdependence of inputs with other domestic sectors. the two above-described computations of the indicator According to Deutsche Bundesbank, an ideal indica- decreases within the period between 2000 and 2007 as tor “should draw on internationally comparable statisti- does the indicator computed by Dustmann et  al. (2014). cal data, be calculated for all countries using the same We strongly believe that the methodological differences method, capture all internationally tradable goods as in the computation of the IO coefficients are the main well as the factors required for their production, com- source for the discrepancy. prehensively represent the price and cost situation and As we replicate our calculation for the period 2000– be available in near time.” (Deutsche Bundesbank 2016a, 2016 using a chain index deflation for industry classi - pp. 14–15). As one can see from the replication, correctly fication, we are able to increase the data quality of the calculating the cost of manufacturing exports is time productivity of outsourced inputs to the services sector. consuming, and subject to difficulties in measuring pro - For this period, the German Federal Statistical Office ductivity and price indices in the service sector. In addi- offers better price deflators for the services sector. Fig - tion, it would imply long time lags because of the delay ure  5 shows that correctly and consistently calculated in data provision, which is violating the requirement of unit labour costs for the manufacturing sector develop availability in near time. closely to total economy unit labour costs. We therefore suggest relying on total economy unit Competitiveness is a relative concept. The calcu - labour costs as an indicator for national cost competitive- lated indicator is only informative if it is available for ness because of fast availability; this indicator would then more countries than only Germany. As the share of have to be corrected by exchange rate changes and can An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 9 of 15 1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Nominal Unit Labor Cost Total Manufacturing Domes�c Interlinkages "Value Added" (defla�on based on chain index, Albu 2020) Nominal Unit Labor Cost Total Economy "Value Added" (defla�on based on chain inde x, Albu 2020) Fig. 5 Total economy unit labour costs vs. manufacturing unit labour costs including domestic interlinkages and imported inputs for the period 2000–2016. For further details see Appendix 2 and Albu (2020). The datasets for the nominal unit labour cost total manufacturing domestic interlinkages “Value Added” (deflation based on chain index, Albu 2020) as well as the nominal unit labour cost total economy “Value Added” (deflation based on chain index, Albu 2020) have been computed via IO-modelling in Albu (2020) for the years 2000, 2005, 2010, 2013, 2015 and 2016. All points in between are estimates based on averages for graphical purposes. Federal Statistical Office, National Accounts, Input–Output Accounts, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production. Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2018 edition. See sources for price deflation for the series 2000–2016 in Fig. 4 more easily be compared to unit labour costs develop- Given these arguments, we recommend the use of total ments of trading competitors. Yet, we only concentrate economy unit labour costs developments. on Germany. Showing the adequacy of total economy unit labour costs for other countries’ exports has to be 7 Conclusions left for future research. Cost competitiveness of exports is often measured by Our finding for Germany is in line with the findings of NEER developments corrected by unit labour cost devel- Deutsche Bundesbank: opments of relevant trade partners. Since the introduc- “… there is some evidence to suggest that indicators tion of the euro, the focus lies more on relative unit based on broadly defined price and cost indices may labour cost developments than on exchange rate devel- be capable of modelling price competitiveness more opments. Some authors consider the relatively low-cost appropriately than more narrowly defined indices, developments in Germany as the key element behind since the latter capture price and cost developments German export success. Dustmann et  al. (2014) go even only in some subsectors of the domestic economy. further by claiming that total unit labour costs would For example, indicators based on unit labour costs even hide the relative cost advantage. They claim that in manufacturing, which were once in widespread unit labour costs for manufacturing exports are relevant, use, cover only one part of relative cost develop- taking into account low costs inputs from the services ments. This is not necessarily representative of over - sector and from abroad. In order to measure the costs, all cost developments in the German economy and they develop a new approach, according to which “true” can therefore easily lead to distortions and misin- unit labour costs decreased by 25% between 1995 and terpretations. Price and cost indices that focus on macroeconomic variables avoid this disadvantage.” (Deutsche Bundesbank, 2016a, p. 13). 1 Page 10 of 15 N. Albu et al. Yet, the new approach for sectoral unit labour costs • Construction price indices: Germany, years, Fach- from Dustmann et al. (2014) does not stand up to closer serie 17 Reihe 4, Price indices for the construction scrutiny. Replicating their results with the help of IO industry; analysis and discussing the implicit assumptions, we • Wholesale price index: Germany, years, economic show that this indicator is methodologically extremely activities (WZ 2008), Fachserie 17 Reihe 6; problematic and clearly exaggerates Germany’s com- • Index of retail prices: Germany, years, economic petitive strength. Using consistent data and consistent activities (WZ 2008), Fachserie 17 Reihe 7; IO coefficients, and sticking to standards, we show that • Producer price indices for transport and logistics nominal unit labour costs of the manufacturing sec- services: Germany, years, economic activities (WZ tor, corrected for inputs from services sector and from 2008), Fachserie 17 Reihe 9.2; abroad, even increased slightly during the period under • Producer price indices for business-related services: study, 1995 to 2007. Germany, years, economic activities (WZ 2008); We additionally calculate unit labour costs in manu- facturing for the period 2000 to 2016, and again correct For the price adjustment of gross value added, produc- for imported intermediate products as well as for inputs tion values, as well as gross fixed capital formation, we from other domestic sectors. For this period, available used the price-adjusted chain indices from the Federal data allows for a better correction of price developments. Statistical Office, National Accounts, Detailed Annual As we show, corrected sectoral unit labour costs closely Results, Domestic Product Calculation, Fachserie 18 match the ones for total economy. Reihe 1.4, 2016 edition. Yet, this approach is highly time consuming and would have to be conducted for all trade partners. As IO data is Appendix 2 only published with delay, we recommend instead using Data and sources for price‑adjustment for the period total economy unit labour costs as a competitive indica- 2000–2016 tor, as this takes the effects of low wages and productivity Figures  4 and 5 show the change in nominal unit labour in the German service sector into account in a methodo- costs of the German manufacturing sector with domes- logically sound way and is available on a timely basis. This tic interlinkages compared to those of the economy as a finding is in line with recommendations from Deutsche whole. The sources used for the computation of the indi - Bundesbank (1998, 2016a). Replications for other coun- cator based on chain index deflation are provided by the tries require further research. German Federal Statistical Office: • Federal Statistical Office, National Accounts, Input– Output Accounts, Fachserie 18 Reihe 2, Input–Out- Appendix 1 put-Tables (IOT) at basic prices of domestic produc- Sources for price‑adjustment for the period 1995–2007 tion. Figures  2 and 3 show the change in nominal unit labour • Federal Statistical Office, National Accounts, costs of the German manufacturing sector with domestic Detailed Annual Results, Domestic Product Calcula- interlinkages based on price index deflation. The follow - tion, Fachserie 18 Reihe 1.4, 2018 edition. ing statistics used for the price index deflation are pro - vided by the German Federal Statistical Office: The different datasets described above capture the institutional delineation (industry classification with • Producer price indices of agricultural products: Ger- regards to product classification) of manufacturing for many, years, Fachserie 17 Reihe 1, Price indices for the indicator’s nominator, i.e., nominal compensation agriculture and forestry; of employees, and its denominator, i.e., real gross value • Producer price indices of products of logging from added, by economic sector. This delineation is in line state forests: Germany, years, Fachserie 17 Reihe 1, with the base tables, i.e., the supply and use tables, used Price indices for agriculture and forestry; to calculate domestic interlinkages as presented by Len- • Index of producer prices of industrial products: Ger- zen and Rueda-Cantuche (2012). The use and supply many, years, goods index (GP 2009), Fachserie 17 tables are not subject to price deflation within this com - Reihe 2, Prices and price indices for industrial prod- putation. We deflated gross value added values by sectors ucts (producer prices); using chain-linked indices from “Fachserie 18 Reihe 1.4”. • Consumer Price Index: Germany, years, Classifica - tion of Individual Consumption Purposes (COI- COP), Fachserie 17 Reihe 7; An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 11 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Real Unit Labor Costs Total Manufacturing Domesc Interlinkages "End Product" Real Unit Labor Costs Tradable Manufacturing Domesc Interlinkages "End Product" Fig. 6 Real manufacturing unit labour costs for the end product. For further details see Albu (2018). Source: Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; own calculations; 1995 = 100 Calculating unit labour costs for the end product Appendix 3 instead of for value added makes a huge difference (of Detailed results for the period 1995–2007 about 20  percentage-points in 2007). This can be seen Figure  6 shows the difference between a methodologi - in Fig. 7. cal inconsistent curve, i.e. Dustmann et al. (2014) [Real] Unit Labour Costs: “End Product” based on Input–Out- put coefficients and SIAB panel wage cost data, and a Accounting for sectoral inputs by using the inverted methodologically correct curve, i.e. Real Unit Labour IO-coefficients based on Destatis for domestic produc - Costs Tradable Manufacturing Domestic Interlinkages tion (as in Dustmann et  al., 2014), instead of IO-coef- “End Product”. The aim of this figure is first to show ficients that account for imported inputs from global that a correct calculation of domestic inputs (leaving tables, changes the development of unit labour costs all other particularities aside) would change the devel- (see Fig.  8). In contrast to Figs.  6, 8 shows the changed opment of unit labour costs mainly during the period development for domestic and foreign inputs (“Global of the second half of the 1990s. Second, as the dotted interlinkages”). and dashed lines are quite similar, the figure also tries to exemplify that unit labour costs for the entire manu- Calculating nominal instead of real unit labour costs facturing industry do not differ in a relevant way from makes a huge difference (of about 10  percentage-points those of the exporting industry (“Tradable Manufactur- in 2007). This can be seen in Fig. 9. ing”), if measured by export shares above 25%. Calculating nominal instead of real unit labour costs It is important to note that the correct incorporation for value added instead of for the end product PLUS cor- of domestic interlinkages combined with the correction rectly including domestic interlinkages (domestic inputs for the other peculiarities (real instead of nominal val- from other sectors) leads to even increasing unit labour ues, end product instead of value added) leads to rather costs for the manufacturing sector (see Fig. 9). important changes in developments of unit labour costs See Fig. 10 and Fig. 11. (see below, especially A6). 1 Page 12 of 15 N. Albu et al. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Real Unit Labor Costs Tradable Manufacturing Domesc Interlinkages "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 7 Manufacturing unit labour costs for the end product vs. for value added. For further details see Dustmann et al. (2014). Dustmann et al., 2014, Appendix B Table A2; Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; own calculations; 1995 = 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Real Unit Labor Costs Total Manufacturing Global Interlinkages "Value Added" Real Unit Labor Costs Total Manufacturing Global Interlinkages "End Product" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 8 Manufacturing unit labour costs based on correct IO-coefficients. For further details see Albu (2018). Dustmann et al., 2014, Appendix B Table A2; Intercountry Input–Output Tables of World Input–Output Database Release 2013 for the years 1995 to 2007; own calculations; 1995 = 100 An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 13 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Unit Labor Costs Total Manufacturing "Value Added" Real Unit Labor Costs Total Manufacturing "Value Added" Fig. 9 Nominal versus real manufacturing unit labour costs for value added. For further details see Albu (2018). Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; the price-adjusted chain indices from the Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2016 edition; own calculations; 1995 = 100 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Value Added Industry Classificaon Real Value Added Industry Classificaon Nominal Value Added Product Classificaon Real Value Added Product Classificaon deflated with price index based on industry classificaon Fig. 10 Nominal versus real value added industry versus product classification. Federal Statistical Office; National Accounts, Input– Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 2000 to 2007; Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2018 edition.; own calculations; 2000 = 100 1 Page 14 of 15 N. Albu et al. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Unit Labor Costs Total Manufacturing Domesc Interlinkages "Value Added" Real Unit Labor Costs Total Manufacturing Domesc Interlinkages "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 11 Nominal versus real manufacturing unit labour costs for value added including domestic interlinkages. Notes: for further details see Albu (2018). Source: Dustmann et al., (2014); Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input– Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; own calculations; 1995 = 100 Acknowledgements Consent for publication We are grateful for comments and suggestions received from Camille Logeay All authors consent that the text and any pictures published in the article will (labour market expert) and Udo Ludwig (IO expert) as well as from partici- be freely available on the internet and may be seen by the general public. pants of an Economics Seminar at IMK. We especially thank Bernd Fitzen- The pictures and text may also appear on other websites or in print, may be berger for clarifying comments, as well as anonymous referees from refereeing translated into other languages or used for commercial purposes. process of the Journal for Labour Market Research. Competing interests Authors’ contributions Not applicable. NA conducted the input–output analysis for the different measures of unit labour costs in the German manufacturing sector. HJ and RZ are responsible Author details 1 2 for discussing the findings and connecting it to total economy unit labour Institute for Economic Research ( WifOR Institute), Berlin, Germany. HT W Ber- costs developments. Both the authors read and approved the final manuscript lin, University of Applied Sciences, Berlin, Germany. Formerly Macroeconomic for submission. Policy Institute (IMK), Düsseldorf, Germany. Funding Received: 8 February 2021 Accepted: 10 January 2022 NA received funding from the macroeconomic policy institute (IMK) at the Hans-Boeckler-foundation for conducting an in-depth input–output analysis of German unit labour costs developments in the manufacturing lecture. Her findings have been published as Albu (2018, see above). The publication served as a basis for the article we submit to the journal. For the other authors, References funding issues are not applicable. Albu, N.: Arbeitskosteneffekte des Vorleistungsbezugs der deutschen Industrie unter Berücksichtigung der Arbeitszeiten. Eine Untersuchung mit der Availability of data and materials Input-Output-Methode. Gutachten des WiFOR Berlin im Auftrag des We use freely available, official data: Calculations for unit labour costs in the Instituts für Makroökonomie und Konjunkturforschung der Hans-Böckler- German manufacturing sector that account for inter-sectoral linkages and Stiftung. IMK Study, No. 56. urn:nbn:de:101:1-201707123568 (2017) imported inputs are based on national accounts data from the German statis- Albu, N.: Lohnstückkosten des deutschen Verarbeitenden Gewerbes: inländis- tical office (Destatis) and Intercountry Input–Output tables ( WIOD). The text che und globale Verflechtungen. Eine Untersuchung mit der Input- briefly explains the calculations. The following articles served as a basis for the Output-Methode. Gutachten des WIFOR Berlin im Auftrag des Instituts IO-analysis and provide an in-depth explanation: Albu (2018) and Albu (2020). für Makroökonomie und Konjunkturforschung der Hans-Böckler-Stiftung. Both are freely available. IMK Study, No. 63. urn:nbn:de:101:1-2019022615104243706892 (2018) Albu, N.: Nominale Lohnstückkosten des deutschen Verarbeitenden Gewer- bes: Inländische Verflechtungen - Eine Untersuchung mit der Input- Declarations Output-Methode. Gutachten des WIFOR Berlin im Auftrag des Instituts für Makroökonomie und Konjunkturforschung der Hans-Böckler-Stiftung. Ethics approval and consent to participate IMK Study, No. 69. urn:nbn:de:101:1-2020071014395035820116 (2020) Not applicable. Altomonte, C., di Mauro, F., Osbat, C.I.: Going beyond labour costs: how and why ‘structural’ and microbased factors can help explaining export An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 15 of 15 1 performance? COMPNET Policy Brief, No. 01. https:// doi. org/ 10. 2866/ 32532 (2013) Barba Navaretti, G., Bugamelli, M., Forlani, E., Ottaviano, G.: The importance of micro data in assessing aggregate outcomes. In: Altomonte, C.; Békes, G. (eds.): Measuring competitiveness in Europe: resource allocation, granu- larity and trade. BRUEGEL Blueprint Series, Vol. XVIV, pp. 14–25. https:// doi. org/ 10. 1093/ cesifo/ ift002 (2016) Deutsche Bundesbank.: The indicator quality of different definitions of the real external value of the Deutsche Mark. Deutsche Bundesbank, Monthly Report No. 11, Frankfurt/Main, November, pp. 39–52 (1998) Deutsche Bundesbank.: The impact of alternative indicators of price competi- tiveness on real exports of goods and services. Deutsche Bundesbank, Monthly Report No. 1, Frankfurt/Main, January, pp. 13–24. https:// www. bunde sbank. de/ resou rce/ blob/ 707538/ 85080 8bd2b 6527b ce2a5 1fe77 c6155 fb/ mL/ 2016–01- impact- data. pdf (2016a) Deutsche Bundesbank.: Wage dynamics amid high euro-area unemploy- ment. Deutsche Bundesbank, Monthly Report No. 12, Frankfurt/Main, December, pp. 33–54. https:// www. bunde sbank. de/ resou rce/ blob/ 707622/ f75c2 130dd 74efc 44b06 5a904 fac88 2c/ mL/ 2016- 12- wage- data. pdf (2016b) Dustmann, C., Fitzenberger, B., Schönberg, U., Spitz-Oener, A.: From sick man of Europe to economic superstar: Germany’s Resurgent Economy. J Econ Perspect 28(1), 167–188 (2014). https:// doi. org/ 10. 1257/ jep. 28.1. 167 Flassbeck, H., Lapavitsas, C.: The systemic crisis of the euro: true causes and effective therapies. Rosa Luxemburg Stiftung Studien. http:// www. rosal ux. de/ filea dmin/ rls_ uploa ds/ pdfs/ Studi en/ Studi en_ The_ syste mic_ crisis_ web. pdf (2013) Gaulier, G., Vicard, V.: Current account imbalances in the euro area: competi- tiveness or demand shock? Bulletin de la Banque de France: Quarterly selection of articles, Issue 27, pp. 5-26. https:// publi catio ns. banque- france. fr/ sites/ defau lt/ files/ medias/ docum ents/ quart erly- selec tion- of- artic les_ 27_ 2012- autumn. pdf (2012) Hartwig, J., Krämer, H.: 50 Jahre Baumol‘sche Kostenkrankheit. Wirtschaftsdi- enst 97(11), 793–800 (2017). https:// doi. org/ 10. 1007/ s10273- 017- 2216-0 Herzog-Stein, A., Joebges, H., Niechoj, T., Stein, U., Zwiener, R.: Nur moderater Anstieg der Arbeitskosten in Deutschland. Arbeits- und Lohnstückkos- tenentwicklung 2014 und 1. Halbjahr 2015 im europäischen Vergleich. IMK Report, No. 109. urn:nbn:de:101:1-201602178265 (2015) Karadeloglou, P., Benkovskis, K. (eds.) and the CompNet Task Force.: Compen- dium on the diagnostic toolkit for competitiveness. ECB Occasional Paper Series, No. 163. http:// hdl. handle. net/ 10419/ 154616 (2015) Leigh, D., Lian, W., Poplawski-Ribeiro, M., Szymanski, R., Tsyrennikov, V., Yang, H.: Exchange rates and trade: a disconnect? IMF Working Paper, WP/17/58. https:// www. imf. org/ en/ Publi catio ns/ WP/ Issues/ 2017/ 03/ 15/ Excha nge- Rates- and- Trade-A- Disco nnect- 44746 (2017) Lenzen, M., Rueda-Cantuche, J.M.: A note on the use of supply-use tables in impact analyses. SORT 36(2), 139–152 (2012) Logeay, C., Stephan, S., Zwiener, R.: Driving forces behind the secto- ral wage costs differentials in Europe. IMK Working Paper, Vol 10. urn:nbn:de:101:1-201202285249 (2011) Loschky, A., Ritter, L.: Konjunkturmotor Export. Statistisches Bundesamt: Wirtschaft und Statistik, Issue 5, pp. 478–488. https:// www. desta tis. de/ DE/ Metho den/ WISTA- Wirts chaft- und- Stati stik/ 2007/ 05/ konju nktur motor- expor t0520 07. pdf; jsess ionid= 4109C 15B9D 848A2 8FAF3 F6818 F6058 FE. inter net87 22?__ blob= publi catio nFile (2007) Ludwig, U.: Arbeitskosteneffekte des Vorleistungsbezugs der deutschen Industrie unter Berücksichtigung der Arbeitszeiten. Eine Untersuchung mit der Input-Output-Methode. Gutachten im Auftrag des Instituts für Makroökonomie und Konjunkturforschung in der Hans-Böckler-Stiftung, IMK Study, No. 34. http:// hdl. handle. net/ 10419/ 106249 (2013) Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in pub- lished maps and institutional affiliations. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal for Labour Market Research Springer Journals

An input–output analysis of unit labour cost developments of the German manufacturing sector since the mid-1990s

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Abstract

According to empirical studies, a statistically significant factor for German exports success is high cost (or price) competitiveness. Studies by Deutsche Bundesbank recommend correcting the nominal effective exchange rate by broad cost (or price) indicators (Deutsche Bundesbank, 1998, 2016a). This would call for total economy unit labour costs. In contrast to these findings, Dustmann et al. (2014) suggest using refined unit labour costs for the exporting manufacturing sector only, corrected for inputs from other sectors and from abroad in an Input–Output (IO) analysis framework. According to these authors’ novel calculation, the export-oriented manufacturing sector of Germany experienced a decrease in unit labour costs by 25% between the mid-1990s and 2007. We try to replicate their find- ings. Following standard approaches in calculating sectoral unit labours costs, correcting for inputs from other sectors and from abroad, and using consistent input–output data from the Federal Statistical Office and from the World Input–Output Database, nominal unit labour costs of the manufacturing sector did not decrease over the period of analysis, and developed similarly to total unit labour costs. The similarity to total economy costs is also confirmed for a more recent period. In contrast to these authors’ claim, our findings are in line with recommendations of Deutsche Bundesbank for using total economy unit labour costs. Keywords: Input–output analysis, German exports, Cost competitiveness, Unit labour costs, Real effective exchange rate, Manufacturing sector, Wage costs, Outsourcing JEL Classification: C67, F16 1 Introduction explain geographical as well as product specialization Export growth depends on several factors: price or cost (Altomonte et al., 2013). competitiveness, non-price competitiveness, the struc- Concentrating on cost (or price) competitiveness of a ture of export products, growth in export destination country’s exports, the most prevalent indicator is the countries, and, as a result, demand from these countries real effective exchange rate (REER), a weighted average (see Altomonte et  al., 2013; Karadeloglou & Benkovskis, of indexed nominal bilateral rates between countries, 2015 for overviews). Non-price competitiveness com- adjusted for relative movements of cost or price indica- prises the size of firms and technological capacities, taxa - tors of the respective countries. Even though manufac- tion, access to finance, public support for research and tured goods dominate German exports, REER adjusted development, and the location of the country that can for unit labour costs of the manufacturing sector would yield a distorted picture of cost competitiveness of Ger- man exports, as they do not include the cost relieving effect of intermediate goods from other domestic sectors *Correspondence: heike.joebges@htw-berlin.de and imported intermediaries (Deutsche Bundesbank, HTW Berlin, University of Applied Sciences, Berlin, Germany 1998, pp. 41–45). Broad-based cost (or price) indicators Full list of author information is available at the end of the article © The Author(s) 2022. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http:// creat iveco mmons. org/ licen ses/ by/4. 0/. 1 Page 2 of 15 N. Albu et al. perform better in explaining and forecasting German exporting manufacturing sector. This period also allows exports than narrowly defined ones (Deutsche Bundes - for a refined correction of price developments. The last bank, 1998, updated 2016a). Thus, total economy unit Sect.  7 concludes, pointing to the advantages of total labour costs are seen as a better correction than sectoral economy unit labour costs. unit labour costs. Since the introduction of the euro, the focus for cost 2 Background: total economy versus sectoral unit (or price) competitiveness has shifted from exchange rate labour costs movements, as they are no longer under national control, While relative unit labour costs can be shown to be to national cost or price developments. For Germany, relevant for cost competitiveness of exports, several several authors see a pivotal role for export success in low authors discuss the appropriateness of sectoral over total unit labour cost developments (see Flassbeck & Lapavit- economy unit labour costs: Total economy wages would sas, 2012; Dustmann et  al., 2014). Yet, in contrast to the include public sector as well as wages from private sec- Bundesbank’s recommendation to concentrate on broad tors like the services sector. Consequently, total economy cost aggregates like total economy unit labour costs, unit labour costs are not always considered as adequate Dustmann et al. (2014) stress that unit labour costs devel- for determining the cost competitiveness of the export opments for the exporting manufacturing sector are the industry. The Bundesbank shows that for the peripheral ones that should be scrutinized. Based on input–output euro area crisis countries the main driver of unit labour (IO) coefficients for Germany, Dustmann et  al. augment cost increases was mainly high public sector wages, not sectoral manufacturing unit labour costs for outsourc- private sector ones (see Deutsche Bundesbank, 2016b). ing of manufacturing production to the services sector. Similarly, Gaulier and Vicard (2012) stress that wage Additionally, they include imported inputs of the manu- developments in non-tradable sectors (instead of export- facturing industry. According to their novel method, oriented manufacturing sectors) triggered the overall unit labour costs of manufacturing exports decreased increase in unit labour costs and prices in exports of by a quarter during 1995 and 2007. Based on these find - peripheral euro area countries. ings, they claim that the real increase in German price The “compendium on the diagnostic toolkit for com - competitiveness is higher than measured by OECD data petitiveness” argues that “measuring price competitive- for total economy unit labour costs. According to the ness based solely on unit labour cost (ULC) developments authors, the enormous decrease in production cost “[…] risks conveying misleading signals” (Karadeloglou & has been the main reason for Germany’s economic suc- Benkovskis, 2015, p. 4). In times of increasing interna- cess over the last decade.” (Dustmann et al., 2014, p.168). tionalization of trade, even wage and unit labour costs Our paper replicates their calculations and discusses developments for individual sectors may be inappropri- the novel approach in detail. We try to show that the ate as they hide inter-firm differences. Barba Navaretti approach is not fully convincing. Conducting a full et al. (2016) show that average productivity developments input–output-analysis based on consistent IO data leads may mask very different distributions of company pro - to estimates of unit labour costs in the manufactur- ductivity, regarding the length of the tails and the skewed ing sector that do not differ in a relevant way from total nature of the distribution. In addition, non-price compet- economy unit labour costs. Given the delay in availabil- itiveness may be just as relevant (Karadeloglou & Benko- ity of IO data, we therefore recommend to stick to total vskis, 2015). economy unit labour costs for cost competitiveness Yet, recent studies find a statistically significant effect considerations. of REER based on total economy unit labour costs in The next Sect.  2 will first summarize pros and cons of estimations for export developments (see Leigh et  al., sectoral unit labour costs, before presenting the method 2017 for a sample of 60 advanced and emerging market for calculating these costs in Sect.  3, where we contrast countries; Deutsche Bundesbank, 2016a for a sample of our approach with the one used by Dustmann et  al. 20 advanced countries with a focus on Germany). Dust- (2014). Section  4 presents the findings, contrasting the mann et al. (2014) stress that total unit labour costs even authors’ findings for the period 1995–2007 with our overstate cost developments of the exporting manufac- results. Section  5 discusses the underlying differences turing sector in Germany. The authors try explicitly to and implicit assumptions.. Section  6 replicates the cal- calculate adjusted unit labour costs for German export- culation of manufacturing sector unit labour costs cor- ing industries, only including those manufacturing seg- rected for imported inputs and inputs from other sectors ments where export shares are above 25%. for the period 2000–2016. The findings are supposed Their approach is partly motivated by wage cost dif - to stress the result that total economy unit labour costs ferences between the manufacturing and the services are an adequate indicator for unit labour costs of the sector: Labour costs for the manufacturing sector in An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 3 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Domesc Inputs Total Foreign Inputs Central and East European (incl. Russia a. Turkey) Inputs Fig. 1 Development of inputs relative to output (production value) for the German Manufacturing sector since 1995, 1995 = 100. Inputs relative to production value (“end product”); imports from Central and East European countries include those from Turkey and Russia; for further details see Appendix 1, 3, and Albu (2018). Source: Intercountry Input–Output Tables from World Input–Output Database, Release 2013 for the years 1995 to 2007; own calculations; 1995 = 100 Germany have been much higher than for the services correct for the differences in full-time and part-time sector, in contrast to most other euro area countries (see shares between the manufacturing and the services sec- Logeay et  al., 2011; Hartwig & Krämer 2017). The cost tor. Albu (2017) finds a wage-cost relief effect for the Ger - difference between the two sectors is highest in Germany man manufacturing industry through the procurement of and amounted to about 20% during the 2000s (Herzog- domestic services of between 8 and 10%. Albu (2017) and Stein et al., 2015, p.7). Consequently, any outsourcing of Ludwig (2013) concentrate on direct and indirect labour activities to the services sector should lower wage costs costs effects, not unit labour costs. of production in the manufacturing sector. Next to inputs from the services sector, imported Yet, as we will show below, the correct procedure by inputs are another factor to correct for. The global trend which interlinkages between manufacturing and service towards greater world trade integration via global value sectors are included is quite complicated. Yet, in the fol- chains, export processing, and other forms of trade lowing, we stick to the overall manufacturing sector integration also affects production in Germany, and as instead of the exporting manufacturing sector, as the dif- a result, exports. The contribution of imported inputs ference in unit labour costs is negligible (see Appendix 3, to value added of exports and imports for re-exports Fig. 6). increased from 30% in 1995 to about 44% in 2006 In order to exactly determine the wage-cost-relief effect (Loschky & Ritter, 2007, p.485). for the German manufacturing sector through the use Imported intermediate products in manufacturing of domestic inputs from the services sector, Albu (2017) output increased from 1995 to 2007 by 70%, as Fig.  1 uses an input–output analysis. By taking the interdepend- shows. Imports increased especially from Central and ence between the manufacturing sectors into account, East European countries (including Turkey and Rus- the approach allows to measure and compare the over- sia). Consequently, total German domestic inputs have all labour costs of each final product, directly accounting decreased during the same time, but still amount to for compensation of employees in production according about 66% of overall total inputs in 2007 (Albu 2018). to the different sectors. As the data provides information Ignoring inputs from other sectors and from overseas on wage costs per person in different production stages, would indeed distort true unit labour costs in manufac- a hypothetical value for macroeconomic labour costs can turing, as Dustmann et al. (2014, p.173f ) rightly state. We be calculated by statistically aligning the distribution of working hours of all production areas and their hourly wages with the distribution of working hours and hourly wages in manufacturing. Ludwig (2013) and Albu (2017) Similarly, Dustmann et al. (2014, p.174) calculate 70%. 1 Page 4 of 15 N. Albu et al. therefore correct for it when calculating unit labour costs negligible (see Appendix 3, Fig. 6). Consequently, we will in manufacturing. concentrate on showing the effects for the whole manu - facturing sector. 3 Method: Measuring unit labour costs Particularities involve the following: of the export industry Our paper replicates the approach by Dustmann et  al. • The calculation for the “end product” instead of for (2014): We calculate unit labour costs of the manufac- the “value added”, turing sector based on a full input–output analysis, tak- • The calculation of “real ” instead of “nominal” unit ing into account inputs from other domestic sectors and labour costs imported inputs. The standard calculation for sectoral • An inadequate correction for imported inputs by unit labour costs (i.e., manufacturing labour costs) is relying on coefficients for imported inputs instead of gross wages and salaries plus social security contributions using global interlinkages from employers in the (manufacturing) sector divided by • An incomplete correction for inputs from other persons employed (or hours of employment), in relation domestic sectors to productivity per person (or per hour) in that sector. • Usage of different data for numerator and denomina - Productivity per person (or per hour) is measured by real tor manufacturing gross value added divided by employment in persons (or hours) or labour force in that sector. Mostly, the effect of each of the particularities on the We try to stay as close as possible to the method used in final cost-relief estimates is comparatively small. How - Dustmann et al. (2014), yet, we stick to conventions: We ever, the use of real unit labour costs instead of nominal calculate nominal unit labour costs for the manufactur- ones has an important effect on final cost-relief calcula - ing sector. We fully correct for interlinkages with other tions. Furthermore, the largest effects arise from the domestic sectors and for imported inputs by an input– usage of “end product” instead of “value added” and from output analysis, thereby focusing on value added of this the adjustment for inputs from other domestic sectors. sector. Calculations for unit labour costs in the German The authors motivate the concentration on unit labour manufacturing sector that account for inter-sectoral link- costs for the “end product”, instead of “value added”, by ages and imported inputs are based on national accounts arguing that this is important for correcting for inputs data from the German statistical office (Destatis) and from other sectors as well as including imported inputs Intercountry Input–Output tables (WIOD), Release 2013 (Dustmann et  al., 2014, pp.173–4). Yet, the corrections for the years 1995 to 2007, complemented by own calcu- seems to be incomplete and inconsistent, as we will show lations (see below). If necessary, we provide additional below. information on the data used in figures (see sources) and in appendices. 4 Results for the period 1995–2007 The authors use a simplified calculation for the trad - Figure  2 shows the effect of three differences to their able manufacturing sector (see additional materials for approach: (1) We calculate unit labour costs for the value Dustmann et  al. 2014 in the Online-Appendix, Figure  4 added instead of for the “end product”, as this is the com- and Table A2). For the means of comparison between the mon indicator. (2) We use a full input–output-analysis Dustmann et  al. (2014)-version of unit labour costs and based on the corresponding global IO-data in order to our calculations, we mirror the authors’ approach, but in fully correct for interlinkages with other sectors. (3) contrast to Dustmann et al. (2014) we are using the meth- We include all relevant wage costs. In order to be able to odologically consistent data provided by an input–output compare only these effects with their approach, we show analysis (Albu 2018). Details will be explained below. the outcome for real unit labour costs (even though nom- Dustmann et  al. use a novel approach of calculating inal costs are the relevant factor for cost competitive- sectoral unit labour costs. We will try to explain the rel- ness). The development we calculate is depicted by the evance of each particular assumption. While each par- interrupted line “Real Unit Labour Costs Total Manufac- ticular step may have limited effects on calculated cost turing Global Interlinkages”. As one can see in Fig. 2, real developments, the combination strongly affects the final unit labour costs for this sector decrease in our approach result. As already explained, Dustmann et al. (2014) con- by only 12%, not by a quarter as in their publication. In centrate on the export-orientated manufacturing sec- tor (those segments of the manufacturing sector with an export share above 25%), but any difference with the Based on this approach, we do not only correct for the cost-relieving effect of imported inputs and inputs from other sector. This approach also takes total manufacturing sector regarding unit labour costs is into account that intermediate goods from the service sector may contain imported inputs. An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 5 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Real Unit Labor Costs Total Manufacturing Domes�c Interlinkages "Value Added" Real Unit Labor Costs Total Manufacturing Global Interlinkages "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 2 Real unit labour costs for the “end product” according to Dustmann et al. (2014) compared to real unit labour costs for the “value added” including domestic and global interlinkages based on IO-analysis, 1995 = 100. Real Unit Labour Costs Total Manufacturing Domestic Interlinkages “Value Added” as well as Real Unit Labour Costs Total Manufacturing Global Interlinkages “Value Added” indices are based on input–output analysis; for further details see Appendix 1, 3, and Albu (2018). Source: Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; Intercountry Input– Output Tables of World Input–Output Database Release 2013 for the years 1995 to 2007; own calculations; 1995 = 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Unit Labor Costs Total Manufacturing Domes�c Interlinkages "Value Added " Nominal Unit Labor Costs Total Economy "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 3 Different measures and concepts of unit labour costs. For further details see Appendix 1, 3, and Albu (2018). Source: Dustmann et al,. (2014); Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2013 inclusive; own calculations; 1995 = 100 1 Page 6 of 15 N. Albu et al. Figs. 2 and 3, the bold line “Dustmann et al. (2014) [Real] struction. As a result, it is not surprizing that the Unit Labour Costs: ‘End product’ based on IO coeffi - unit labour costs for the end product calculated by cients” always represents unit labour costs of the export- Dustmann et al. decrease. ing manufacturing sector as calculated by Dustmann iii. The authors try to account for inputs from other et  al. (2014): in real terms, for the “end product”, and sectors. Yet, instead of conducting a full IO analy- based on IO coefficients in order to account for inputs sis for the unit labour cost index, required from a from other sectors. methodological point of view, they use the coeffi - cients of the inverted IO-matrix for including wage 5 Discussion of results for the period 1995–2007 costs from other sectors. This approach does not We judge the usage of IO coefficients for imported inter - correctly account for all interlinkages and econo- mediate products instead of fully accounting for global mies of scope and, in particular, does not correct interlinkages based on an IO-analysis and data sources as for differences in the share of part-time workers suboptimal due to the following reasons: between sectors. The latter has a significant influ - ence on the calculation of the cost advantages of i. Usage of inconsistent data: While the authors use the German industry relative to the industries of output variables from the Federal Statistical Office, other countries in the use of cost-effective inputs they do not complement it with the consistent sec- from the services sector, as Ludwig (2013) and toral labour cost data available for this purpose for Albu (2017) show. their IO calculations, but use instead data from iv. The authors miss this redistribution in the denomi - the Sample of Integrated Labour Market Biogra- nator because no IO coefficients were used. The phies (SIAB), coupled with IO coefficients (see assumption that the end product contains the value Dustmann et al., 2014, Appendix B, Table 2a). The added shares of the purchased intermediate con- SIAB is a 2 percent random sample drawn from the sumption is only partially correct, since the deduc- Integrated Employment Biographies (IEB) of the tions of value added for use of other intermediate Institute for Employment Research (IAB). By using consumption were not taken into account. This is this data set, several distortions occur: The specific particularly the case for the export-strong indus- development in East Germany is ignored and the tries, since finished parts are exported in order to changes in employers’ social security contributions be reused. are not taken into account. Contrary to the authors’ v. Furthermore, Dustmann et  al. justify the decision statement (Dustmann et  al., 2014, p.171), the to measure unit labour costs on the basis of the increasing wage spread in individual sectors can- industrial end product by the fact that not only not have any influence on the calculation of unit upstream inputs from Germany but also those labour costs, as only average labour costs per capita from abroad are to be included, since the produc- are used for this purpose. In order to avoid these tion value includes all imports (Dustmann et  al., problems, we use instead national accounts data for 2014, p.176). In principle, nothing would stand in Germany (including East Germany and employers’ the way of the inclusion of imported intermediate social security contributions). inputs, especially as these have increased sharply ii. The authors calculate unit labour costs for the “end over the period under study, especially imports product” but only include domestic cumulative of German manufacturing from Eastern Europe inputs (based on domestic IO coefficients), losing (Albu, 2018). However, the linkages with other intercountry interlinkages. This methodological countries are absent in the indicator Unit Labour shift accounts for about 15  percentage-points dif- Costs: "End Product", since the IO coefficients of ference of the final decrease in costs (see the dotted Destatis used by Dustmann et  al. in connection line “global Interlinkages” for the corrected value with the production value (Dustmann et  al., 2014, added approach that at the same time corrects for Appendix B, Table A2) refer only to domestic pro- global interlinkages with other countries/sectors duction, excluding imports, and therefore do not versus the bold line for Dustmann et al. (2014) “end offer weights for foreign inputs to production. In product” in Fig.  2). This approach implies ignoring order to correctly account for imported inputs, the the wage costs incorporated in the imported inputs authors should have used global intercountry IO- but using overall output at the same time. Given tables, provided e.g., by WIOD. Figure  2 shows that imported inputs increased over the period studied by the authors, this approach generates a WIOD provides an intercountry-Input–Output Table for the years 1995 to negative trend in the calculated indicator by con- 2011 and 2000 to 2014. An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 7 of 15 1 that the use of input coefficients stemming from Domestic Interlinkages ‘Value Added’” in Fig.  3) and global IO-tables for interlinkages and economies of are thus closer to unit labour costs of the total economy scope would have led to a different development of (line “Nominal Unit Labour Costs Total Economy ‘Value unit labour costs including domestic interlinkages: Added’” in Fig. 3). lower in the second half of the 1990s and almost Based on this criticism, we think that the approach identical in the 2000s. used by Dustmann et  al. (2014) is not convincing and heavily understates true cost developments in the (trad- In contrast to the authors, we stick to calculating nomi- able) manufacturing sector. Figure  2 demonstrates nal unit labour costs that we deem more appropriate for the effects of particularities in the approach by Dust - measuring cost competitiveness. That the authors cal - mann et  al. (2014): The use of “end product” instead of culate real unit labour costs is a consequence of having “value added” decreases unit labour costs by more than nominal values for wages and salaries in the numerator 10  percentage-points. Concentrating on real unit labour and nominal values for output in the denominator, by costs instead of nominal unit labour costs, adds another using the nominal “end product” instead of real value 10 percentage-points (see Fig. 9 in Appendix 3). added and IO coefficients of Destatis based on input– We agree with Dustmann et  al. (2014) and Deutsche output tables with nominal values. If the indicator Bundesbank (1998, 2016a) that unit labour costs for the reflected total economy unit labour costs, it would serve manufacturing sector are not a good indicator for the as an indicator for income distribution (measuring the competitiveness of the German manufacturing export wage share of GDP in real terms), instead of an indicator sector, as this indicator would ignore lower cost inputs for nominal costs per unit of output. While they argue from the service sector and from abroad. Yet, the rep- that the difference between real and nominal unit labour lication of Dustmann et  al. (2014) and the necessary costs is negligible, we show below that this difference corrections show that their particular approach is not amounts to about 10  percentage-points for the manu- convincing and overstates the decline. An indicator for facturing sector and cannot be ignored (see Appendix 3, nominal unit labour costs in manufacturing based on Fig. 9). consistent IO coefficients and consistent data sources Correctly accounting for interlinkages stemming from would even indicate increasing costs (see Fig. 4). intermediate inputs from other sectors, nominal unit labour costs even increase in the period from 1995 to 6 Robustness check for the period 2000–2016 2007, since productivity in the services sectors is lower In addition to the computation of nominal labour costs than industry’s (Fig.  3). The overall lower productiv - in manufacturing including domestic interlinkages based ity development resulting from the interlinkages with on a price index deflation (Albu 2018), we replicate the the services sector increases both real and nominal unit indicator using a refined measure (Albu, 2020) including labour costs, i.e. irrespective of whether the production two methodological differences with regards to the com - value or gross value added is used as the denominator putation in Fig. 3: firstly, the price deflation used is based in the calculation of productivity. This explains the sur - on a chain index deflation of the value added (denomina - prising result that the inclusion of services sector inputs tor); secondly, the interlinkages computed are based on increases unit labour costs, due to the lower productivity supply-use tables for industry classification (see Fig.  10 in in this sector. Yet, this effect might be overrated because Appendix 3). the higher share of part-time workers in the service sec- tor in fact lowers the measured productivity increase in this sector (Albu, 2017). Ultimately, the authors’ idea of including the inter- The increase of nominal unit labour costs for the total manufacturing indus - linkages between the different sectors leads to a result try including domestic interlinkages compared to the base year seems to be in which the unit labour costs of industry, including the overestimated by about 10 percentage points in 2007 (as the gap between the interlinking effects using the IO-methodology, show development of real and nominal unit labour costs without interlinkages only makes up for about 10%. This can be seen in figure A4 in appendix III). The no decline at all in the period under consideration (line calculated increase is mainly due to the partial unavailability of price indices “Nominal Unit Labour Costs Total Manufacturing for the respective period, especially for the service sectors (see Albu, 2018). Discounting the 10 percentage points difference from the nominal unit labour costs including interlinkages would a) decrease the gap in figure A6 (appendix III) to still about 25 percentage points between the nominal unit labour costs with interlinkages and Dustmann et al. (2014) adjusted version of the former and b) change the line “Nominal Unit Labour Costs Total Manufacturing Domestic Interlinkages ‘Value Added’” to be closer to unit labour costs of total As the indicator only refers to the manufacturing sector, it cannot be consid- economy (line “Nominal Unit Labour Costs Total Economy ‘Value Added’”) ered as an indicator for income distribution. in Fig. 3. 1 Page 8 of 15 N. Albu et al. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Nominal Unit Labor Cost Total Manufacturing Domes‰c Interlinkages "Value Added" (defla‰on based on price index, Albu 2018) Nominal Unit Labor Cost Total Manufacturing Domes‰c Interlinkages "Value Added" (defla‰on based on chain index, Albu 2020) Fig. 4 Different Measures, Concepts and Deflation Methods of ULC. For further details see Appendix 1, 2, 3 and Albu (2018, 2020). The nominal unit labor cost total manufacturing domestic interlinkages “Value Added” (deflation based on chain index, Albu 2020) has been computed via IO-modelling in Albu (2020) for the years 2000, 2005, 2010, 2013, 2015 and 2016. All points in between are estimates based on averages for graphical purposes. Source: For both series ending in 2007, see source Fig. 3. For the series running up to 2016: Federal Statistical Office, National Accounts, Input–Output Accounts, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production. Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2018 edition Figure  4 shows a level difference between the trend manufacturing exports differs between countries, sec - of the computation based on the price index deflation toral unit labour costs would have to be calculated (Albu, 2018) and the computation based on the chain matching the respective export composition. It would index deflation (Albu, 2020). Despite the level difference, be required to include the cost effect resulting from the which is mainly due to the deflation methods, neither of interdependence of inputs with other domestic sectors. the two above-described computations of the indicator According to Deutsche Bundesbank, an ideal indica- decreases within the period between 2000 and 2007 as tor “should draw on internationally comparable statisti- does the indicator computed by Dustmann et  al. (2014). cal data, be calculated for all countries using the same We strongly believe that the methodological differences method, capture all internationally tradable goods as in the computation of the IO coefficients are the main well as the factors required for their production, com- source for the discrepancy. prehensively represent the price and cost situation and As we replicate our calculation for the period 2000– be available in near time.” (Deutsche Bundesbank 2016a, 2016 using a chain index deflation for industry classi - pp. 14–15). As one can see from the replication, correctly fication, we are able to increase the data quality of the calculating the cost of manufacturing exports is time productivity of outsourced inputs to the services sector. consuming, and subject to difficulties in measuring pro - For this period, the German Federal Statistical Office ductivity and price indices in the service sector. In addi- offers better price deflators for the services sector. Fig - tion, it would imply long time lags because of the delay ure  5 shows that correctly and consistently calculated in data provision, which is violating the requirement of unit labour costs for the manufacturing sector develop availability in near time. closely to total economy unit labour costs. We therefore suggest relying on total economy unit Competitiveness is a relative concept. The calcu - labour costs as an indicator for national cost competitive- lated indicator is only informative if it is available for ness because of fast availability; this indicator would then more countries than only Germany. As the share of have to be corrected by exchange rate changes and can An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 9 of 15 1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Nominal Unit Labor Cost Total Manufacturing Domes�c Interlinkages "Value Added" (defla�on based on chain index, Albu 2020) Nominal Unit Labor Cost Total Economy "Value Added" (defla�on based on chain inde x, Albu 2020) Fig. 5 Total economy unit labour costs vs. manufacturing unit labour costs including domestic interlinkages and imported inputs for the period 2000–2016. For further details see Appendix 2 and Albu (2020). The datasets for the nominal unit labour cost total manufacturing domestic interlinkages “Value Added” (deflation based on chain index, Albu 2020) as well as the nominal unit labour cost total economy “Value Added” (deflation based on chain index, Albu 2020) have been computed via IO-modelling in Albu (2020) for the years 2000, 2005, 2010, 2013, 2015 and 2016. All points in between are estimates based on averages for graphical purposes. Federal Statistical Office, National Accounts, Input–Output Accounts, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production. Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2018 edition. See sources for price deflation for the series 2000–2016 in Fig. 4 more easily be compared to unit labour costs develop- Given these arguments, we recommend the use of total ments of trading competitors. Yet, we only concentrate economy unit labour costs developments. on Germany. Showing the adequacy of total economy unit labour costs for other countries’ exports has to be 7 Conclusions left for future research. Cost competitiveness of exports is often measured by Our finding for Germany is in line with the findings of NEER developments corrected by unit labour cost devel- Deutsche Bundesbank: opments of relevant trade partners. Since the introduc- “… there is some evidence to suggest that indicators tion of the euro, the focus lies more on relative unit based on broadly defined price and cost indices may labour cost developments than on exchange rate devel- be capable of modelling price competitiveness more opments. Some authors consider the relatively low-cost appropriately than more narrowly defined indices, developments in Germany as the key element behind since the latter capture price and cost developments German export success. Dustmann et  al. (2014) go even only in some subsectors of the domestic economy. further by claiming that total unit labour costs would For example, indicators based on unit labour costs even hide the relative cost advantage. They claim that in manufacturing, which were once in widespread unit labour costs for manufacturing exports are relevant, use, cover only one part of relative cost develop- taking into account low costs inputs from the services ments. This is not necessarily representative of over - sector and from abroad. In order to measure the costs, all cost developments in the German economy and they develop a new approach, according to which “true” can therefore easily lead to distortions and misin- unit labour costs decreased by 25% between 1995 and terpretations. Price and cost indices that focus on macroeconomic variables avoid this disadvantage.” (Deutsche Bundesbank, 2016a, p. 13). 1 Page 10 of 15 N. Albu et al. Yet, the new approach for sectoral unit labour costs • Construction price indices: Germany, years, Fach- from Dustmann et al. (2014) does not stand up to closer serie 17 Reihe 4, Price indices for the construction scrutiny. Replicating their results with the help of IO industry; analysis and discussing the implicit assumptions, we • Wholesale price index: Germany, years, economic show that this indicator is methodologically extremely activities (WZ 2008), Fachserie 17 Reihe 6; problematic and clearly exaggerates Germany’s com- • Index of retail prices: Germany, years, economic petitive strength. Using consistent data and consistent activities (WZ 2008), Fachserie 17 Reihe 7; IO coefficients, and sticking to standards, we show that • Producer price indices for transport and logistics nominal unit labour costs of the manufacturing sec- services: Germany, years, economic activities (WZ tor, corrected for inputs from services sector and from 2008), Fachserie 17 Reihe 9.2; abroad, even increased slightly during the period under • Producer price indices for business-related services: study, 1995 to 2007. Germany, years, economic activities (WZ 2008); We additionally calculate unit labour costs in manu- facturing for the period 2000 to 2016, and again correct For the price adjustment of gross value added, produc- for imported intermediate products as well as for inputs tion values, as well as gross fixed capital formation, we from other domestic sectors. For this period, available used the price-adjusted chain indices from the Federal data allows for a better correction of price developments. Statistical Office, National Accounts, Detailed Annual As we show, corrected sectoral unit labour costs closely Results, Domestic Product Calculation, Fachserie 18 match the ones for total economy. Reihe 1.4, 2016 edition. Yet, this approach is highly time consuming and would have to be conducted for all trade partners. As IO data is Appendix 2 only published with delay, we recommend instead using Data and sources for price‑adjustment for the period total economy unit labour costs as a competitive indica- 2000–2016 tor, as this takes the effects of low wages and productivity Figures  4 and 5 show the change in nominal unit labour in the German service sector into account in a methodo- costs of the German manufacturing sector with domes- logically sound way and is available on a timely basis. This tic interlinkages compared to those of the economy as a finding is in line with recommendations from Deutsche whole. The sources used for the computation of the indi - Bundesbank (1998, 2016a). Replications for other coun- cator based on chain index deflation are provided by the tries require further research. German Federal Statistical Office: • Federal Statistical Office, National Accounts, Input– Output Accounts, Fachserie 18 Reihe 2, Input–Out- Appendix 1 put-Tables (IOT) at basic prices of domestic produc- Sources for price‑adjustment for the period 1995–2007 tion. Figures  2 and 3 show the change in nominal unit labour • Federal Statistical Office, National Accounts, costs of the German manufacturing sector with domestic Detailed Annual Results, Domestic Product Calcula- interlinkages based on price index deflation. The follow - tion, Fachserie 18 Reihe 1.4, 2018 edition. ing statistics used for the price index deflation are pro - vided by the German Federal Statistical Office: The different datasets described above capture the institutional delineation (industry classification with • Producer price indices of agricultural products: Ger- regards to product classification) of manufacturing for many, years, Fachserie 17 Reihe 1, Price indices for the indicator’s nominator, i.e., nominal compensation agriculture and forestry; of employees, and its denominator, i.e., real gross value • Producer price indices of products of logging from added, by economic sector. This delineation is in line state forests: Germany, years, Fachserie 17 Reihe 1, with the base tables, i.e., the supply and use tables, used Price indices for agriculture and forestry; to calculate domestic interlinkages as presented by Len- • Index of producer prices of industrial products: Ger- zen and Rueda-Cantuche (2012). The use and supply many, years, goods index (GP 2009), Fachserie 17 tables are not subject to price deflation within this com - Reihe 2, Prices and price indices for industrial prod- putation. We deflated gross value added values by sectors ucts (producer prices); using chain-linked indices from “Fachserie 18 Reihe 1.4”. • Consumer Price Index: Germany, years, Classifica - tion of Individual Consumption Purposes (COI- COP), Fachserie 17 Reihe 7; An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 11 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Real Unit Labor Costs Total Manufacturing Domesc Interlinkages "End Product" Real Unit Labor Costs Tradable Manufacturing Domesc Interlinkages "End Product" Fig. 6 Real manufacturing unit labour costs for the end product. For further details see Albu (2018). Source: Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; own calculations; 1995 = 100 Calculating unit labour costs for the end product Appendix 3 instead of for value added makes a huge difference (of Detailed results for the period 1995–2007 about 20  percentage-points in 2007). This can be seen Figure  6 shows the difference between a methodologi - in Fig. 7. cal inconsistent curve, i.e. Dustmann et al. (2014) [Real] Unit Labour Costs: “End Product” based on Input–Out- put coefficients and SIAB panel wage cost data, and a Accounting for sectoral inputs by using the inverted methodologically correct curve, i.e. Real Unit Labour IO-coefficients based on Destatis for domestic produc - Costs Tradable Manufacturing Domestic Interlinkages tion (as in Dustmann et  al., 2014), instead of IO-coef- “End Product”. The aim of this figure is first to show ficients that account for imported inputs from global that a correct calculation of domestic inputs (leaving tables, changes the development of unit labour costs all other particularities aside) would change the devel- (see Fig.  8). In contrast to Figs.  6, 8 shows the changed opment of unit labour costs mainly during the period development for domestic and foreign inputs (“Global of the second half of the 1990s. Second, as the dotted interlinkages”). and dashed lines are quite similar, the figure also tries to exemplify that unit labour costs for the entire manu- Calculating nominal instead of real unit labour costs facturing industry do not differ in a relevant way from makes a huge difference (of about 10  percentage-points those of the exporting industry (“Tradable Manufactur- in 2007). This can be seen in Fig. 9. ing”), if measured by export shares above 25%. Calculating nominal instead of real unit labour costs It is important to note that the correct incorporation for value added instead of for the end product PLUS cor- of domestic interlinkages combined with the correction rectly including domestic interlinkages (domestic inputs for the other peculiarities (real instead of nominal val- from other sectors) leads to even increasing unit labour ues, end product instead of value added) leads to rather costs for the manufacturing sector (see Fig. 9). important changes in developments of unit labour costs See Fig. 10 and Fig. 11. (see below, especially A6). 1 Page 12 of 15 N. Albu et al. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Real Unit Labor Costs Tradable Manufacturing Domesc Interlinkages "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 7 Manufacturing unit labour costs for the end product vs. for value added. For further details see Dustmann et al. (2014). Dustmann et al., 2014, Appendix B Table A2; Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; own calculations; 1995 = 100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Real Unit Labor Costs Total Manufacturing Global Interlinkages "Value Added" Real Unit Labor Costs Total Manufacturing Global Interlinkages "End Product" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 8 Manufacturing unit labour costs based on correct IO-coefficients. For further details see Albu (2018). Dustmann et al., 2014, Appendix B Table A2; Intercountry Input–Output Tables of World Input–Output Database Release 2013 for the years 1995 to 2007; own calculations; 1995 = 100 An input–output analysis of unit labour cost developments of the German manufacturing sector… Page 13 of 15 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Unit Labor Costs Total Manufacturing "Value Added" Real Unit Labor Costs Total Manufacturing "Value Added" Fig. 9 Nominal versus real manufacturing unit labour costs for value added. For further details see Albu (2018). Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; the price-adjusted chain indices from the Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2016 edition; own calculations; 1995 = 100 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Value Added Industry Classificaon Real Value Added Industry Classificaon Nominal Value Added Product Classificaon Real Value Added Product Classificaon deflated with price index based on industry classificaon Fig. 10 Nominal versus real value added industry versus product classification. Federal Statistical Office; National Accounts, Input– Output-Rechnung, Fachserie 18 Reihe 2, Input–Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 2000 to 2007; Federal Statistical Office, National Accounts, Detailed Annual Results, Domestic Product Calculation, Fachserie 18 Reihe 1.4, 2018 edition.; own calculations; 2000 = 100 1 Page 14 of 15 N. Albu et al. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nominal Unit Labor Costs Total Manufacturing Domesc Interlinkages "Value Added" Real Unit Labor Costs Total Manufacturing Domesc Interlinkages "Value Added" Dustmann et al. (2014) [Real] Unit Labor Costs: "End Product" based on IO coefficients Fig. 11 Nominal versus real manufacturing unit labour costs for value added including domestic interlinkages. Notes: for further details see Albu (2018). Source: Dustmann et al., (2014); Federal Statistical Office; National Accounts, Input–Output-Rechnung, Fachserie 18 Reihe 2, Input– Output-Tables (IOT ) at basic prices of domestic production for Germany for the years 1995 to 2007 inclusive; own calculations; 1995 = 100 Acknowledgements Consent for publication We are grateful for comments and suggestions received from Camille Logeay All authors consent that the text and any pictures published in the article will (labour market expert) and Udo Ludwig (IO expert) as well as from partici- be freely available on the internet and may be seen by the general public. pants of an Economics Seminar at IMK. We especially thank Bernd Fitzen- The pictures and text may also appear on other websites or in print, may be berger for clarifying comments, as well as anonymous referees from refereeing translated into other languages or used for commercial purposes. process of the Journal for Labour Market Research. Competing interests Authors’ contributions Not applicable. NA conducted the input–output analysis for the different measures of unit labour costs in the German manufacturing sector. HJ and RZ are responsible Author details 1 2 for discussing the findings and connecting it to total economy unit labour Institute for Economic Research ( WifOR Institute), Berlin, Germany. HT W Ber- costs developments. Both the authors read and approved the final manuscript lin, University of Applied Sciences, Berlin, Germany. Formerly Macroeconomic for submission. Policy Institute (IMK), Düsseldorf, Germany. Funding Received: 8 February 2021 Accepted: 10 January 2022 NA received funding from the macroeconomic policy institute (IMK) at the Hans-Boeckler-foundation for conducting an in-depth input–output analysis of German unit labour costs developments in the manufacturing lecture. Her findings have been published as Albu (2018, see above). The publication served as a basis for the article we submit to the journal. For the other authors, References funding issues are not applicable. Albu, N.: Arbeitskosteneffekte des Vorleistungsbezugs der deutschen Industrie unter Berücksichtigung der Arbeitszeiten. Eine Untersuchung mit der Availability of data and materials Input-Output-Methode. Gutachten des WiFOR Berlin im Auftrag des We use freely available, official data: Calculations for unit labour costs in the Instituts für Makroökonomie und Konjunkturforschung der Hans-Böckler- German manufacturing sector that account for inter-sectoral linkages and Stiftung. IMK Study, No. 56. urn:nbn:de:101:1-201707123568 (2017) imported inputs are based on national accounts data from the German statis- Albu, N.: Lohnstückkosten des deutschen Verarbeitenden Gewerbes: inländis- tical office (Destatis) and Intercountry Input–Output tables ( WIOD). The text che und globale Verflechtungen. Eine Untersuchung mit der Input- briefly explains the calculations. The following articles served as a basis for the Output-Methode. Gutachten des WIFOR Berlin im Auftrag des Instituts IO-analysis and provide an in-depth explanation: Albu (2018) and Albu (2020). für Makroökonomie und Konjunkturforschung der Hans-Böckler-Stiftung. Both are freely available. IMK Study, No. 63. urn:nbn:de:101:1-2019022615104243706892 (2018) Albu, N.: Nominale Lohnstückkosten des deutschen Verarbeitenden Gewer- bes: Inländische Verflechtungen - Eine Untersuchung mit der Input- Declarations Output-Methode. Gutachten des WIFOR Berlin im Auftrag des Instituts für Makroökonomie und Konjunkturforschung der Hans-Böckler-Stiftung. Ethics approval and consent to participate IMK Study, No. 69. urn:nbn:de:101:1-2020071014395035820116 (2020) Not applicable. 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Statistisches Bundesamt: Wirtschaft und Statistik, Issue 5, pp. 478–488. https:// www. desta tis. de/ DE/ Metho den/ WISTA- Wirts chaft- und- Stati stik/ 2007/ 05/ konju nktur motor- expor t0520 07. pdf; jsess ionid= 4109C 15B9D 848A2 8FAF3 F6818 F6058 FE. inter net87 22?__ blob= publi catio nFile (2007) Ludwig, U.: Arbeitskosteneffekte des Vorleistungsbezugs der deutschen Industrie unter Berücksichtigung der Arbeitszeiten. Eine Untersuchung mit der Input-Output-Methode. Gutachten im Auftrag des Instituts für Makroökonomie und Konjunkturforschung in der Hans-Böckler-Stiftung, IMK Study, No. 34. http:// hdl. handle. net/ 10419/ 106249 (2013) Publisher’s Note Springer Nature remains neutral with regard to jurisdictional claims in pub- lished maps and institutional affiliations.

Journal

Journal for Labour Market ResearchSpringer Journals

Published: Dec 1, 2022

Keywords: Input–output analysis; German exports; Cost competitiveness; Unit labour costs; Real effective exchange rate; Manufacturing sector; Wage costs; Outsourcing; C67; F16

References