International comparisons of the levels of unit labor costs in manufacturing

Comparing absolute levels of unit labor costs across countries entails translating labor compensation rates and productivity measured in national currencies into a common currency (e.g., U.S. dollars). Compensation rates are translated using market exchange rates and productivity is translated using relative output price levels. This paper focuses on the estimation of relative output price levels. Two approaches have been used, one based on relative unit values and the other on expenditure PPPs. We use primarily the latter approach and extend earlier work in this area by adjusting expenditure PPPs for biases introduced by indirect taxes, distribution margins, and trade prices. We compute for each of the G-7 industrial countries unit labor cost levels in U.S. dollars for total manufacturing and for various subsectors of manufacturing. Our estimates suggest that in 1995, U.S. unit labor costs were substantially below those in Japan and Germany, somewhat below those in France and the United Kingdom, and very similar to those in Canada and Italy. The cross-country differences we find are somewhat larger than--albeit qualitatively similar to--those obtained using the unit value approach.