Compositional effects on productivity, labour cost and export adjustments
AbstractSectoral shifts, such as shrinkage of low labour productivity and the low-wage construction sector, can lead to apparent increased aggregate average labour productivity and average wages, especially when capital intensity differs across sectors. For 11 main sectors and 13 manufacturing sub-sectors, we quantify the compositional effects on productivity, wages and unit labour costs (ULCs) based and real effective exchange rates (REER), for 24 EU countries. Compositional effects are greatest in Ireland, where the pharmaceutical sector drives the growth of output and productivity, but other sectors have suffered greatly and have not yet recovered. Our new ULC-REER measurements, which are free from compositional effects, correlate well with export performance. Among the countries facing the most severe external adjustment challenges, Lithuania, Portugal and Ireland have been the most successful based on five indicators, and Latvia, Estonia and Greece the least successful. There is evidence of downward wage flexibility in some countries, but wage cuts have corrected just a small fraction of pre-crisis wage rises and came with massive reductions in employment even in the business sector excluding construction and real estate, highlighting the difficulty of adjusting wages downward. As a background document for this Policy Contribution, Zsolt released the working paper Productivity, labour cost and export adjustment: Detailed results for 24 EU countries which presents detailed results for 24 EU countries on: sectoral changes in the economy;Unit labour costs (ULC) based real effective exchange rate (REER) and its main components; Export performance.
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Bibliographic InfoPaper provided by Bruegel in its series Policy Contributions with number 730.
Date of creation: Jun 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-EEC-2012-07-01 (European Economics)
- NEP-EFF-2012-07-01 (Efficiency & Productivity)
- NEP-HME-2012-07-01 (Heterodox Microeconomics)
- NEP-LAB-2012-07-01 (Labour Economics)
- NEP-OPM-2012-07-01 (Open Economy Macroeconomics)
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- Martin Gächter & Hanno Lorenz & Paul Ramskogler & Maria Antoinette Silgoner, 2013. "An Export-Based Measure of Competitiveness," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 75â92.
- O'Brien, Derry & Scally, John, 2012. "Cost Competitiveness and Export Performance of the Irish Economy," Quarterly Bulletin Articles, Central Bank of Ireland, pages 86-102, July.
- Zsolt Darvas, 2012. "Intra-euro rebalancing is inevitable but insufficient," Policy Contributions 747, Bruegel.
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