This is a short video looking at sectional unit labour costs for the UK economy up to the first quarter of 2013.
Firstly we need to define what unit labour costs are. We’ll take an example of workers at a box factory.
The box producing firm has to pay a cost of labour; for example, wages to workers and social security contributions to the government.
Now if we take the total of those costs and divide them by the output that is produced, we get the unit labour cost.
This measure tells us the amount a firm pays for workers to produce one unit of output. If workers produce more output and total labour costs remain the same, unit labour costs will decrease. In contrast, if wages and other labour costs increase, but output remains the same, unit labour costs would increase.
Unit labour costs are useful indicators of productivity and competitiveness, through the relationship between the volume and costs of inputs to outputs, and also provide an indication of inflationary pressures through labour costs of production.
Since The Recession
Next we will look at unit labour costs since the recession, using this graph.
The dotted line shows an index of 100 from quarter 1 2008; so below the line, unit labour costs would be lower than in quarter 1 2008, and above, they would be higher.
Unit labour costs for the whole economy, shown by the red line, illustrate an upward trend over the period with an overall increase of 12% up to the first quarter of 2013
Let’s explore what the potential drivers in the increasing unit labour costs could be.
We can look at total labour cost, output and productivity over the same period shown by the green, black and blue lines respectively.
Output per hour productivity of the labour force directly affects unit labour costs. We can see this has fallen for the whole economy with a 5.1% decrease since 2008.
Let’s explain this further.
We saw earlier that unit labour costs can be calculated by dividing total labour costs by output.
Total labour costs are approximately equal to the number of hours worked multiplied by the cost of labour.
Therefore we can put this into our original equation so that unit labour costs are now equal to the number of hours worked multiplied by the cost of labour divided by output
Next we can look at labour productivity, which is output divided by hours.
If we rearrange this equation we can see that output equals labour productivity multiplied by hours.
We can then replace this into the original unit labour cost equation so that unit labour costs equals to the number of hours worked multiplied by the cost of labour divided by labour productivity multiplied by the number of hours worked.
We can then remove the number of hours worked from the top and bottom of the equation since they cancel each other out, so therefore unit labour costs equals the cost of labour divided by labour productivity.
Mathematically, the changes in unit labour costs would be equal to the change in labour costs minus the change in labour productivity.
We can rearrange this equation to tell us what the changes in labour costs are.
From here we can input the figures from the previous graph. We saw a 12% increase in unit labour costs and a fall of 5.1% in labour productivity.
Theoretically, this tells us that the approximate change in labour costs was 6.9% - which includes both wages and other costs.
Going back to the previous chart, we can see the increase in total labour cost, driven by both an increase in labour costs and total hours worked as well as falling productivity, exceeded the increase in output, therefore causing increasing unit labour costs since the 2008 recession.
Industry Breakdown / Sectional ULC
Now we will look at sectional unit labour costs, the UK economy can be broken down in to different industries for which data are available, such as manufacturing, construction, and finance and insurance.
New data can be found for the services sector of the economy which accounts for about three quarters of total output, and the production sector which accounts for most of the rest.
Furthermore, data is also available for the market sector of the economy, which excludes most government outputs and some public bodies.
If we take a closer look at services and production, it can be seen that up to 2010, both show increasing trends in unit labour costs. Recently, the increase for the service sector has flattened somewhat whilst the increase for the production sector has grown steeper. This reflects the different movement in output per hour in the two sectors.
That concludes this short overview of Sectional Unit Labour Costs.
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